November 3, 2010

Naked access has been banned:

SEC commissioners voted 5-0 today to approve a rule that requires brokers to implement pre-trade risk controls when clients use the firms’ identification codes to trade directly on exchanges. Agency officials proposed the regulation in January, saying they were concerned that a computer malfunction or human error might trigger an order that would erode a broker’s capital.

The SEC rule targets so-called naked-sponsored access, in which a customer uses a broker’s identification code while bypassing pre-trade risk controls. The tactic is used by traders whose strategy of buying and selling thousands of shares in milliseconds would be slowed if they executed through a broker.

I would have thought that the potential for erosion of the brokers’ capital was the brokers’ problem. But nowadays, I guess, everything is a public utility.

The FOMC statement was pretty much as expected:

Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

Voting against the policy was Thomas M. Hoenig. Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits. Mr. Hoenig also was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.

The FRBNY gave details of the implementation; it should be noted that they are also reinvesting principal repayments received from their mortgage portfolio. However, the market was unimpressed by the term-structure of the proposed purchases:

Treasury 30-year bond fell the most in two months after the Federal Reserve said it will buy fewer of the securities than anticipated by investors in its $600 billion program of purchases to boost the economy.

The difference between rates on 30-year bonds and Treasury Inflation Protected Securities touched the highest since May 2008 on concern the Fed will be successful in reigniting inflation.

“The yield curve should start to steepen because the Fed will focus on 5- to 6- years,” said William Larkin, a fixed income portfolio manager in Salem, Massachusetts at Cabot Money Management, which manages $500 million. “The risk once they finish is that inflation will be elevated. There’s a good chance we’ll be rip-roaring in terms of growth and inflation.”

Thirty-year bond yields rose 13 basis points to yield 4.06 percent at 4:02 p.m. in New York, the biggest rise since Sept. 9. The 3.875 percent bonds due in August 2040 rose [sic - I think they meant "declined" - JH] 2 8/32, or $22.50 per $1,000, to 96 26/32.

The difference between rates on 30-year bonds and Treasury Inflation Protected Securities, touched 2.74 percent, the highest since May 2008 when the financial crisis was intensifying.

The Potash takeover has been blocked; apparently if Canadians are allowed sell their (minority) position in the company at a good price, we’re too damn stupid to reinvest the money and will just waste it on beer and prostitutes. I eagerly await the next sermon on productivity.

Today’s most surprising news is that Premier Dad has done something intelligent:

Premier Dalton McGuinty announced Wednesday that 75 PhD students will receive full four-year scholarships, each worth $40,000 annually, starting in the 2011-12 school years. The program is billed as the first of its kind in Canada.

It remains to be seen just what fields of study will be emphasized.

The Canadian preferred share market had another good day, with both PerpetualDiscounts and FixedResets up 20bp, on continued high volume (Desjardins had a good day!). This is getting really dull. Remember the good old days of the Panic of 2007, when you read this blog just to find out how much money you’d lost? And it took half an hour just to scan the Performance Highlights table? That was fund. FixedResets set a new all-time yield low … I’ll post about it in a while.

PerpetualDiscounts now yield 5.37%, equivalent to 7.52% interest at the standard equivalency factor of 1.4x. Long Corporates now yield 5.2% (OK, a little over. Sue me) so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 230bp, a slight (and perhaps meaningless) tightening from the 235bp reported on October 29.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.3739 % 2,207.1
FixedFloater 4.94 % 3.52 % 26,120 19.18 1 1.1494 % 3,402.8
Floater 2.70 % 2.37 % 56,997 21.33 4 0.3739 % 2,383.1
OpRet 4.80 % 3.31 % 79,275 1.88 9 -0.0467 % 2,387.7
SplitShare 5.86 % -14.48 % 65,974 0.09 2 0.4056 % 2,403.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0467 % 2,183.3
Perpetual-Premium 5.63 % 5.12 % 160,469 3.09 24 0.0530 % 2,021.3
Perpetual-Discount 5.35 % 5.37 % 257,574 14.80 53 0.2031 % 2,039.0
FixedReset 5.20 % 2.88 % 344,769 3.23 50 0.2047 % 2,289.4
Performance Highlights
Issue Index Change Notes
IAG.PR.C FixedReset -1.53 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-30
Maturity Price : 25.00
Evaluated at bid price : 27.08
Bid-YTW : 3.67 %
BMO.PR.K Perpetual-Discount -1.37 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-03
Maturity Price : 24.21
Evaluated at bid price : 24.44
Bid-YTW : 5.37 %
BNA.PR.C SplitShare 1.07 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 22.75
Bid-YTW : 5.89 %
MFC.PR.B Perpetual-Discount 1.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-03
Maturity Price : 21.20
Evaluated at bid price : 21.20
Bid-YTW : 5.57 %
BAM.PR.G FixedFloater 1.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-03
Maturity Price : 25.00
Evaluated at bid price : 22.00
Bid-YTW : 3.52 %
MFC.PR.E FixedReset 1.20 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-19
Maturity Price : 25.00
Evaluated at bid price : 26.91
Bid-YTW : 3.69 %
MFC.PR.C Perpetual-Discount 1.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-03
Maturity Price : 20.51
Evaluated at bid price : 20.51
Bid-YTW : 5.57 %
ELF.PR.G Perpetual-Discount 1.54 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-03
Maturity Price : 20.50
Evaluated at bid price : 20.50
Bid-YTW : 5.85 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.K Perpetual-Discount 176,198 Desjardins crossed blocks of 76,200 and 86,700, both at 24.00.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-03
Maturity Price : 23.73
Evaluated at bid price : 24.00
Bid-YTW : 5.02 %
TD.PR.R Perpetual-Premium 120,060 Desjardins crossed blocks of 69,000 shares, 32,900 and 11,800, all at 25.70.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-05-30
Maturity Price : 25.00
Evaluated at bid price : 25.70
Bid-YTW : 5.14 %
CM.PR.P Perpetual-Premium 94,780 Desjardins crossed blocks of 25,000 and 68,400, both at 25.26.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-11-28
Maturity Price : 25.00
Evaluated at bid price : 25.21
Bid-YTW : 5.12 %
SLF.PR.C Perpetual-Discount 85,594 RBC crossed blocks of 50,000 and 22,800, both at 20.69.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-03
Maturity Price : 20.83
Evaluated at bid price : 20.83
Bid-YTW : 5.41 %
BAM.PR.T FixedReset 81,735 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-03
Maturity Price : 23.07
Evaluated at bid price : 24.92
Bid-YTW : 4.19 %
BMO.PR.L Perpetual-Premium 64,960 Desjardins crossed 56,700 at 26.10.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-24
Maturity Price : 25.00
Evaluated at bid price : 26.02
Bid-YTW : 5.05 %
There were 54 other index-included issues trading in excess of 10,000 shares.

4 Responses to “November 3, 2010”

  1. Louis says:

    I did not follow the market today (had to “work”) but note that my prefs went up. Did it happen in the afternoon after the Fed’s announcement with its 600 billion quantitative easing? If so, could it be that holders of US monopoly money realised it might be safer to put some their eggs in the Canadian pref market?

  2. jiHymas says:


    TXPR Index 2010-11-3

    It certainly got going in the afternoon, but I’m hesitant to draw any conclusions about the effect of QE2. The effect on the DEX Bond Universe was muted at best:


    DEX Universe 2010-11-3

  3. [...] briefly noted yesterday, the FixedReset Index set a new all-time low yield record as of the close November 3 with a mark of [...]

  4. [...] PerpetualDiscounts now yield 5.28%, equivalent to 7.39% interest at the standard equivalency factor of 1.4x. Long Corporates now yiel about 5.3%, so the pre-tax interest-equivalent spread is now about 210bp, a sharp tightening from the 230bp reported on November 3. [...]

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