October 30, 2008

There is news of a substantial drop in LIBOR:

The swap agreements with central banks, which also followed rate cuts from China to Norway, led to a drop in three-month rates in Asia. The London interbank offered rate, or Libor, for three- month loans in dollars slid 23 basis points to 3.19 percent today, its 14th consecutive drop, according to the British Bankers’ Association. The overnight dollar rate tumbled 41 basis points to 0.73 percent, the lowest level since at least January 2001.

The three-month Libor for dollars remains 219 basis points above the Fed’s rate, up from 82 basis points the day Lehman failed. It was 192 basis points yesterday before the rate cut.

The re-intermediation (novo-intermediation? It hasn’t really been done before) by the Fed in the US commercial paper markets (discussed last weekend) has continued big-time with the Fed’s latest H.4.1 release showing an increase of nearly $200-billion in deposits from banks, offset by a decline of $36-billion in Treasury balances, an increase of $145-billion in commercial paper holdings and an increase of $22-billion in foreign currency assets.

I expressed concern yesterday that the Excess Reserves / Discount Window spread, at 60bp, was too small to encourage reintermediation by the the banks – I’d like to see that bumped to 85bp just for starters. But I’m less concerned about the spread on the Commercial Paper Funding Facility – at 235bp for regular commercial paper, it’s high enough to encourage reintermediation by the banks as soon as they’re feeling a little braver.

Derek DeCloet has a column in today’s Globe cackling with glee over hedge funds that didn’t hedge; in this category comes a fund from Deephaven which is being deep-sixed:

Deephaven Capital Management LLC, the hedge-fund unit of stockbroker Knight Capital Group Inc., froze a $1.6 billion fund after investors asked to get back 30 percent of their money.

Withdrawals from the Deephaven Global Multistrategy Fund were suspended so managers wouldn’t be forced to sell assets in falling stock and debt markets, the Minnetonka, Minnesota-based firm said today in a letter to investors. Lenders and trading partners also imposed stricter financing requirements, according to the letter.

If it was an actual hedge fund, of course, they would be buying just as much as selling. But perhaps I quibble.

Treasury today released guidance on tax breaks for Fannie & Freddie preferred share investors (as long as they’re banks):

The Treasury Department and the Internal Revenue Service today issued Revenue Procedure 2008-64 (Rev. Proc. 2008-64), which provides that certain gains and losses from indirect ownership of Fannie Mae and Freddie Mac preferred stock can be treated as ordinary income and loss.

The Emergency Economic Stabilization Act of 2008 (EESA) provided banks and certain financial institutions ordinary treatment for gains and losses on direct investments in preferred stock of Fannie Mae and Freddie Mac. It also directed the Treasury Department to issue guidance with respect to the treatment of these gains or losses when realized indirectly through certain investment vehicles.

Rev. Proc. 2008-64 provides banks and certain other financial institutions the benefit of ordinary treatment on gains and losses that they are experiencing on certain indirect investments in this preferred stock.

And, just to ensure everybody is cheerful, there is news of a lock-up in the Japanese bond market:

Japanese yen corporate bond sales dried up in the second half of October as the seizure in global credit markets, plunging equity values and volatility in the Asian nation’s currency deterred investors.

Toyota Finance Corp. was the last company to sell yen bonds when it issued 42 billion yen ($428 million) of three- and five- year notes on Oct. 15, data compiled by Bloomberg show. The Tokyo-based lessor reduced that sale from a planned 50 billion yen after market turmoil pushed up borrowing costs, a company official said at the time.

“The credit market is dead,” said Kazuaki Oh’e, a debt salesman in Tokyo at CIBC World Markets Japan, part of Canada’s fifth-biggest bank. “Investors don’t want to buy anything because there’s so much credit risk right now.”

An active day for prefs – and there were many lower-quality issues trading in good volume that weren’t included in the tally.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30.
The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index.
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 5.51% 5.65% 68,044 14.86 6 +1.5931% 948.7
Floater 7.10% 7.20% 44,033 12.29 2 +0.1245% 487.2
Op. Retract 5.32% 6.25% 139,562 4.05 14 +0.3423% 995.1
Split-Share 6.40% 11.19% 59,283 3.97 12 +0.2109% 919.0
Interest Bearing 7.91% 12.82% 62,873 3.25 3 +1.9088% 894.0
Perpetual-Premium 7.10% 7.21% 51,203 12.26 1 +0.0000% 873.8
Perpetual-Discount 6.94% 7.01% 176,473 12.58 70 +0.4196% 783.5
Fixed-Reset 5.36% 5.06% 767,762 15.22 10 +0.6165% 1,075.6
Major Price Changes
Issue Index Change Notes
LBS.PR.A SplitShare -5.8683% Asset coverage of 1.7+:1 as of October 23, according to Brompton Group. Now with a pre-tax bid-YTW of 10.98% based on a bid of 7.86 and a hardMaturity 2013-11-29 at 10.00. Closing quote of 7.86-34, 3×1. Day’s range of 7.81-80.
HSB.PR.C PerpetualDiscount -5.3305% Now with a pre-tax bid-YTW of 7.29% based on a bid of 17.76 and a limitMaturity. Closing quote 17.76-18, 3×2. Day’s range 17.99-19.19.
PWF.PR.E PerpetualDiscount -4.7782% Now with a pre-tax bid-YTW of 7.10% based on a bid of 19.53 and a limitMaturity. Closing Quote 19.53-89, 3×1. Day’s range of 19.53-51.
CU.PR.B PerpetualDiscount -4.2581% Now with a pre-tax bid-YTW of 6.86% based on a bid of 22.26 and a limitMaturity. Closing quote 22.26-74, 1X3. Day’s range 22.00-23.50.
W.PR.J PerpetualDiscount -2.8571% Now with a pre-tax bid-YTW of 8.35% based on a bid of 17.00 and a limitMaturity. Closing quote 17.00-24, 8X3. Day’s range 16.56-50.
TD.PR.M OpRet +2.1199% Now with a pre-tax bid-YTW of 4.68% based on a bid of 25.05 and a softMaturity. Closing quote 25.05-39, 18×5. All three trades were at 24.95.
POW.PR.A PerpetualDiscount +2.2277% Now with a pre-tax bid-YTW of 6.86% based on a bid of 20.65 and a limitMaturity. Closing quote 20.65-94. Day’s range 20.49-65.
PWF.PR.F PerpetualDiscount +2.2593% Now with a pre-tax bid-YTW of 6.96% based on a bid of 19.01 and a limitMaturity. Closing quote 19.01-75, 2X8. Day’s range 18.81-25.
SLF.PR.A PerpetualDiscount +2.3016% Now with a pre-tax bid-YTW of 7.14% based on a bid of 16.89 and a limitMaturity. Closing quote 16.89-17.98, 15X2. Day’s range 16.41-00.
FTN.PR.A SplitShare +2.396% Asset coverage of 1.9+:1 as of October 15 according to the company. Now with a pre-tax bid-YTW of 8.96% based on a bid of 8.12 and a hardMaturity 2015-12-1 at 10.00. Closing quote 8.12-24, 33X2. Day’s range of 7.99-24
BNA.PR.B SplitShare +2.4419% Asset coverage of just under 2.8:1 as of September 30 according to the company. Coverage now of 2.1-:1 based on BAM.A at 21.86 and 2.4 BAM.A held per preferred. Now with a pre-tax bid-YTW of 11.12% based on a bid of 17.62 and a hardMaturity 2016-3-25 at 25.00. Compare with BNA.PR.A (20.08% to 2010-9-30) and BNA.PR.C (13.59% to 2019-1-10). Closing quote 17.62-00, 5X20. Day’s range 17.52-00.
LFE.PR.A SplitShare +2.4419% Asset coverage of 1.8+:1 as of October 15 according to the company. Now with a pre-tax bid-YTW of 8.83% based on a bid of 8.81 and a hardMaturity 2012-12-1 at 10.00. Closing quote of 8.81-43, 3X3. One trade at 9.00
CM.PR.E PerpetualDiscount +2.4731% Now with a pre-tax bid-YTW of 7.42% based on a bid of 19.06 and a limitMaturity. Closing Quote 19.06-17, 4X5. Day’s range of 18.65-25.
CU.PR.A PerpetualDiscount +3.0928% Now with a pre-tax bid-YTW of 6.42% based on a bid of 23.00 and a limitMaturity. Closing Quote 23.00-75, 7X5. Day’s range of 23.00-75.
WFS.PR.A SplitShare +3.3333% Asset coverage of 1.4-:1 as of October 23, according to Mulvihill. Now with a pre-tax bid-YTW of 16.32% based on a bid of 7.75 and a hardMaturity 2011-6-30 at 10.00. Closing quote of 7.75-96, 1×1. Day’s range of 7.50-75.
CM.PR.D PerpetualDiscount +3.4648% Now with a pre-tax bid-YTW of 7.48% based on a bid of 19.41 and a limitMaturity. Closing Quote 19.41-55, 2X10. Day’s range of 18.99-25.
BSD.PR.A InterestBearing +3.6036% Asset coverage of 0.9+:1 as of October 24 according to Brookfield Funds. Now with a pre-tax bid-YTW of 17.66% based on a bid of 5.75 and a hardMaturity 2015-3-31 at 10.00 … though as pointed out by Assiduous Reader prefhound, use of $10.00 maturity value is, at the very least, something of a leap of faith. Closing quote of 5.75-89, 36X4. Day’s range of 5.65-36
POW.PR.D PerpetualDiscount +3.6600% Now with a pre-tax bid-YTW of 7.20% based on a bid of 17.56 and a limitMaturity. Closing Quote 17.56-71, 1×1. Day’s range of 17.00-72.
CM.PR.K FixedReset +4.3956%  
BCE.PR.I FixFloat +4.4776%  
Volume Highlights
Issue Index Volume Notes
CM.PR.I PerpetualDiscount 217,527 Nesbitt crossed 200,000 at 15.50. Now with a pre-tax bid-YTW of 7.65% based on a bid of 15.51 and a limitMaturity
CM.PR.G PerpetualDiscount 140,300 Nesbitt crossed 50,000 at 17.76, then 78,400 at 18.00. Now with a pre-tax bid-YTW of 7.58% based on a bid of 17.98 and a limitMaturity
ALB.PR.A SplitShare 132,872 CIBC crossed 128,600 at 23.55. Asset coverage of 1.5+:1 as of October 23 according to Scotia Managed Companies. Now with a pre-tax bid-YTW of 9.28% based on a bid of 22.62 and a hardMaturity 2011-2-28 at 25.00. Closing quote of 22.62-54, 1×2. Day’s range of 22.56-23.57.
CM.PR.J PerpetualDiscount 108,995 Nesbitt crossed 88,800 at 15.00. Now with a pre-tax bid-YTW of 7.57% based on a bid of 15.00 and a limitMaturity.
TD.PR.O PerpetualDiscount 76,800 Nesbitt crossed 60,000 at 18.25. Now with a pre-tax bid-YTW of 6.64% based on a bid of 18.41 and a limitMaturity.

There were thirty-eight other index-included $25-pv-equivalent issues trading over 10,000 shares today.

4 Responses to “October 30, 2008”

  1. Sami says:

    Great site with lot of useful info.

    I am a novice to prefs but I am looking at some of the issues with yields north of 9% of highly rated companies. I have always thought and learned that bonds and Prefs prices react inversely to interest rates. my question is why the monstrous decline in pref prices when bank of canada has been cutting its rates and seems destined to cut more in the future?

    thanks

  2. jiHymas says:

    The Bank of Canada controls only the overnight rate on government credit. That’s it.

    Long rates do not necessarily move in lockstep with short rates; corporate rates do not necessarily move in lockstep with government rates (especially nowadays!) and preferreds do not necessarily move in lockstep with long corporates.

    See my essay The Swoon in June for some illustrative charts.

    A shorter answer to your question is: what investors want right now is maximum liquidity and minimum credit risk – and preferreds aren’t selling what they’re buying.

  3. Sami says:

    Thanks for the reply.

    your article was very good. But assuming the credit situation of the company is intact wouldn’t interest rate and pricing relationships restore themselves to conventional over the long run.

  4. jiHymas says:

    assuming the credit situation of the company is intact wouldn’t interest rate and pricing relationships restore themselves to conventional over the long run.

    Probably!

    Structural shifts in the marketplace can occur (e.g., in the fifties, you couldn’t sell a stock unless the dividend yield exceeded the interest yield on bonds) and the long run can be a very long time.

    Place yer bets, squire, place yer bets! Go with the odds, but DIVERSIFY so that no one bet – or set of related circumstances – will wipe you out.

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