September 4, 2012

There are some indications of the size of QE3:

Federal Reserve Bank of San Francisco President John Williams called for additional bond purchases by the Fed to spur economic growth that would be open- ended and total at least $600 billion.

High unemployment and inflation below the Fed’s 2 percent target “would argue for additional accommodation now,” Williams said today in an interview on Bloomberg Television from Jackson Hole, Wyoming. “I would like to see something that has a measurable effect on job growth. That would be arguing for a pretty large program” that’s “at least as large as QE2,” or the second round of quantitative easing, he said.

The fiscal cliff in the US pales beside the Spanish one:

Spanish Prime Minister Mariano Rajoy said the country is unable to fund itself at the current cost of borrowing and needs sacrifices such as higher taxes to restore its national standing.

“If we do this we will start to recover confidence as a serious country that does what it says,” Rajoy said today in a speech to members of his People’s Party at Soutomaior Castle in Galicia. “At the moment we can’t finance ourselves at the prices of the market.”

Rajoy was addressing supporters in his home region on the same day that increases to value-added tax take effect. Spanish households already are squeezed by unemployment at close to 25 percent and austerity measures that will be equal to 15 percent of gross domestic product by 2014.

Covered bonds are in the news!

Investors could earn juicy yields buying beaten-up covered bonds secured on Spanish mortgages. The snag is that no one can really tell what would happen in a covered bond default.

It’s hard not to be tempted by the yields on offer on some Spanish mortgage covered bonds, securities that rank alongside senior debt, but have a priority claim on the banks’ real estate loans. Take Bankia, the soon-to-be-recapitalized lender, whose such bonds maturing in May 2018 are yielding almost 9 per cent, according to Thomson Reuters prices, about three percentage points more than Spanish government securities.

Take Bankia. At the end of the first quarter, each euro of its covered bonds was backed by 2.08 euros worth of residential and commercial real estate loans according to Moody’s. Assume a stressed scenario similar to the Irish housing downturn, as modelled by Fitch Ratings. The collateral would still fetch enough to cover 111 per cent of the debt, even after deducting expected losses from defaults and assuming each loan had to be sold for 70 cents of its nominal value, according to a Breakingviews analysis.

Still, there are reasons to be wary. First, the amount of collateral backing the bonds is not set in stone; it would reduce over time before default, say if a bank issued lots of covered bonds to the European Central Bank. Second, it’s hard to see who would buy the loans in an extreme, systemic crisis. Losses could be even steeper if Spain left the €.

The Canadian preferred share market started the month on a sour note, with PerpetualPremiums off 1bp, FixedResets losing 8bp and DeemedRetractibles down 5bp. Volatility was average, but dominated by Enbridge which announced a new issue today. Volume was extremely low, also dominated by Enbridge.

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 -0.3074 % 2,397.3
FixedFloater 0.00 % 0.00 % 0 0.00 1 -0.3074 % 3,586.2
Floater 3.04 % 3.08 % 54,085 19.45 3 -0.3074 % 2,588.5
OpRet 4.63 % 3.37 % 29,647 0.79 4 -0.0859 % 2,548.6
SplitShare 5.48 % 5.00 % 74,576 4.62 3 -0.0400 % 2,797.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0859 % 2,330.5
Perpetual-Premium 5.29 % 3.31 % 91,459 0.36 28 -0.0062 % 2,278.7
Perpetual-Discount 4.94 % 4.97 % 101,495 15.45 3 -0.4281 % 2,531.0
FixedReset 4.98 % 3.00 % 171,901 3.95 70 -0.0794 % 2,428.1
Deemed-Retractible 4.94 % 3.51 % 118,866 1.96 46 -0.0510 % 2,368.3
Performance Highlights
Issue Index Change Notes
ENB.PR.D FixedReset -1.53 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-04
Maturity Price : 23.18
Evaluated at bid price : 25.15
Bid-YTW : 3.61 %
ENB.PR.H FixedReset -1.42 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-04
Maturity Price : 23.11
Evaluated at bid price : 25.00
Bid-YTW : 3.45 %
HSB.PR.C Deemed-Retractible -1.42 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-10-04
Maturity Price : 25.50
Evaluated at bid price : 25.76
Bid-YTW : 3.46 %
ENB.PR.B FixedReset -1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-04
Maturity Price : 23.24
Evaluated at bid price : 25.17
Bid-YTW : 3.62 %
Volume Highlights
Issue Index Shares
Traded
Notes
ENB.PR.B FixedReset 165,880 RBC crossed four blocks: 75,000 shares, 17,200 shares, 20,000 and 10,500, all at 25.20.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-04
Maturity Price : 23.24
Evaluated at bid price : 25.17
Bid-YTW : 3.62 %
CM.PR.P Deemed-Retractible 111,920 Called for redemption.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-10-29
Maturity Price : 25.00
Evaluated at bid price : 25.29
Bid-YTW : 1.38 %
ENB.PR.N FixedReset 111,445 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-04
Maturity Price : 23.17
Evaluated at bid price : 25.23
Bid-YTW : 3.83 %
ENB.PR.H FixedReset 97,716 RBC crossed 25,000 at 25.00.

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-04
Maturity Price : 23.11
Evaluated at bid price : 25.00
Bid-YTW : 3.45 %

ENB.PR.F FixedReset 42,234 RBC crossed 25,000 at 25.20.
Maturity Type : Limit Maturity
Maturity Date : 2042-09-04
Maturity Price : 23.18
Evaluated at bid price : 25.20
Bid-YTW : 3.70 %
ENB.PR.D FixedReset 27,536 TD crossed 10,000 at 25.20.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-04
Maturity Price : 23.18
Evaluated at bid price : 25.15
Bid-YTW : 3.61 %
There were 4 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
TCA.PR.Y Perpetual-Premium Quote: 51.61 – 51.98
Spot Rate : 0.3700
Average : 0.2665

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-05
Maturity Price : 50.00
Evaluated at bid price : 51.61
Bid-YTW : 3.74 %

BAM.PR.M Perpetual-Discount Quote: 24.25 – 24.49
Spot Rate : 0.2400
Average : 0.1597

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-04
Maturity Price : 23.97
Evaluated at bid price : 24.25
Bid-YTW : 4.97 %

SLF.PR.D Deemed-Retractible Quote: 23.15 – 23.35
Spot Rate : 0.2000
Average : 0.1217

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.15
Bid-YTW : 5.45 %

GWO.PR.G Deemed-Retractible Quote: 25.29 – 25.50
Spot Rate : 0.2100
Average : 0.1358

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-12-31
Maturity Price : 25.25
Evaluated at bid price : 25.29
Bid-YTW : 3.54 %

SLF.PR.F FixedReset Quote: 26.20 – 26.42
Spot Rate : 0.2200
Average : 0.1461

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.20
Bid-YTW : 3.06 %

SLF.PR.I FixedReset Quote: 25.50 – 25.70
Spot Rate : 0.2000
Average : 0.1328

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.50
Bid-YTW : 3.69 %

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