I received an eMail from an Assiduous Reader today, asking whether I agreed that the pref market was looking rather frothy.
Well – I agree it’s frothy, in that there are huge discrepencies between issues – it’s not too difficult to pick pairs of issues where one is as obviously expensive as the other is cheap. However, “frothy” has a connotation of “toppy”, and I’m not so sure that I agree with the word as far as that goes. Having a look at the four bellwether indices:
| Index Performance | ||||
| Index | Now | Trough | Trough Date |
Zero Return Since |
| PerpetualDiscount | 937.1 | 899.0 | 2007-11-27 | 2007-10-5 |
| PerpetualPremium | 1,043.9 | 997.8 | 2007-10-23 | 2007-9-27 |
| SplitShare | 1,043.9 | 1043.9 | 2007-11-26 | 2007-10-19 |
| OpRet | 1,042.1 | 1025.5 | 2007-10-29 | Now at Peak |
Toppy? It looks more as if the bad dream of the fourth quarter has faded like gossamer … one might be able to make the case that the OpRet Index is toppy, since there’s not much interest-equivalent premium to bonds … but PerpetualDiscounts still have an average pre-tax bid-YTW of 5.49 … interest-equivalent of 7.69% … long corporates are a shade over 5.6%, according to Canadian Bond Indices …. this is within spitting distance of the October 30 spread.
Meanwhile, long Canadas yield 4.04% (!) for an interest-equivalent spread of about 365bp – this has widened considerably since this was checked on October 10.
So, as with all market-timing type questions, I will respond … “You’re asking me?”
Volume picked up slightly, but not much, on another good day. BNA.PR.C was astounding.
| 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 | |||||||
| Index | Mean Current Yield (at bid) | Mean YTW | Mean Average Trading Value | Mean Mod Dur (YTW) | Issues | Day’s Perf. | Index Value |
| Ratchet | 5.63% | 5.71% | 64,106 | 15.54 | 2 | -6.9095% | 999.3 |
| Fixed-Floater | 4.93% | 5.31% | 74,647 | 15.12 | 9 | +0.3720% | 1,032.3 |
| Floater | 5.20% | 5.24% | 92,932 | 15.18 | 3 | +1.6065% | 845.9 |
| Op. Retract | 4.82% | 2.89% | 80,208 | 3.42 | 15 | +0.0854% | 1,042.1 |
| Split-Share | 5.24% | 5.35% | 103,607 | 4.34 | 15 | +0.7011% | 1,043.9 |
| Interest Bearing | 6.32% | 6.50% | 59,540 | 3.44 | 4 | +0.1795% | 1,066.1 |
| Perpetual-Premium | 5.76% | 4.70% | 66,654 | 4.97 | 12 | +0.1172% | 1,020.5 |
| Perpetual-Discount | 5.46% | 5.49% | 355,590 | 14.68 | 54 | +0.2441% | 937.1 |
| Major Price Changes | |||
| Issue | Index | Change | Notes |
| BCE.PR.B | RatchetRate | -15.1515% | Shoot the market maker! 150 shares traded at 24.75 at 10:44 am, and that was it for the day. Closed at 21.00-24.75, 10×6. |
| LBS.PR.A | SplitShare | -1.1823% | Asset coverage of just under 2.3:1 as of January 3, according to Brompton Group. Now with a pre-tax bid-YTW of 5.20% based on a bid of 10.03 and a hardMaturity 2013-11-29 at 10.00. |
| MFC.PR.C | PerpetualDiscount | -1.1261% | Now with a pre-tax bid-YTW of 5.17% based on a bid of 21.95 and a limitMaturity. |
| IAG.PR.A | PerpetualDiscount | +1.0143% | Now with a pre-tax bid-YTW of 5.28% based on a bid of 21.91 and a limitMaturity. |
| WFS.PR.A | SplitShare | +1.0891% | Asset coverage of just under 2.0:1 as of December 31 according to Mulvihill. Now with a pre-tax bid-YTW of 4.65% based on a bid of 10.21 and a hardMaturity 2011-6-30 at 10.00. |
| PWF.PR.L | PerpetualDiscount | +1.4298% | Now with a pre-tax bid-YTW of 5.38% based on a bid of 24.12 and a limitMaturity. |
| BCE.PR.Z | FixFloat | +1.5580% | |
| HSB.PR.D | PerpetualDiscount | +1.7447% | Now with a pre-tax bid-YTW of 5.26% based on a bid of 23.91 and a limitMaturity. |
| BNA.PR.B | SplitShare | +1.9946% | Asset coverage of 3.7+:1 as of November 30, according to the company. Now with a pre-tax bid-YTW of 6.66% based on a bid of 22.50 and a hardMaturity 2016-3-25 at 25.00. |
| BAM.PR.B | Floater | +2.3047% | |
| FBS.PR.B | SplitShare | +2.5773% | Asset coverage of just under 1.7:1 as of January 3, according to TD Securities. Now with a pre-tax bid-YTW of 5.01% based on a bid of 9.95 and a hardMaturity 2011-12-15 at 10.00. |
| BAM.PR.K | Floater | +2.7042% | |
| BNA.PR.C | SplitShare | +7.1212% | Asset coverage of 3.7+:1 as of November 30, according to the company. Now with a pre-tax bid-YTW of 6.37% based on a bid of 21.21 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (6.10% to 2010-9-30) and BNA.PR.B (6.66% to 2016-3-25). Believe it or not, this return is actually legitimate. A burst of trading (of 6,400 shares, all purchased by RBC) took the price up from 20.82 at 3:48pm to 21.64 at 3:59pm. Closed at 21.21-64, 5×10. Will it last? |
| Volume Highlights | |||
| Issue | Index | Volume | Notes |
| BAM.PR.M | PerpetualDiscount | 57,552 | Now with a pre-tax bid-YTW of 6.38% based on a bid of 18.80 and a limitMaturity. |
| WFS.PR.A | SplitShare | 116,700 | RBC crossed 75,000 at 10.37. See above for issue characteristics. |
| BAM.PR.N | PerpetualDiscount | 35,200 | Now with a pre-tax bid-YTW of 6.47% based on a bid of 18.54 and a limitMaturity. |
| RY.PR.D | PerpetualDiscount | 18,350 | Now with a pre-tax bid-YTW of 5.28% based on a bid of 21.54 and a limitMaturity. |
| TD.PR.O | PerpetualDiscount | 17,840 | Now with a pre-tax bid-YTW of 5.25% based on a bid of 23.10 and a limitMaturity. |
There were seven other index-included $25.00-equivalent issues trading over 10,000 shares today.
Will it last with BNA.PR.C? I don’t know, but I did close out my arbitrage trade (short PR.B and long PR.C) today at $2.03 spread (entered at $4.20 47 days ago for an 11.1% return after costs). Hurray James! I remember all those lengthy discussions trying to rationalize the irrational. Good thing we don’t need perfect information to make investment decisions.
I don’t think the pref market is frothy either. It is doing exactly what illiquid markets do – move sharply on lowish volume when nobody is paying attention. During the decline last fall, volumes were (I believe) related to tax loss selling. Now that business is gone; anyone who sold is certain not to be buying prefs this soon; those who didn’t sell want to hold; issuers who normally sell at this time of year are afraid of the yield they have to pay (and maybe terms, too), so there is no “action”.
It got so ridiculous last year that prefs even made sense in RRSPs because retail investors have so few bond choices! Go figure. My guess is we’ve got another 5-10% this year in pref gains (assuming corporate interest rates stay the same).
Froth was evident A YEAR AGO when issuers were rapidly churning out new issues at very low yields and with no interest rate protection. If that happens again, you’ll know its frothy ….
The lengthy discussions referred to by prefhound were in a BNA.PR.C-dedicated post late November.
Nice going, prefhound!
[…] Reversing yesterday’s idiotic plunge. Closed at 24.10-75, 1×11, on no volume. […]
[…] Asset coverage of 3.6+:1 as of December 31, according to the company. Now with a pre-tax bid-YTW of 6.88% based on a bid of 20.35 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (6.25% to 2010-9-30) and BNA.PR.B (6.83% to 2016-3-25). The loss isn’t too much of a surprise, really, considering its recent huge gain. This issue will soon be deleted from the index. […]
[…] Closed at 23.70-49, 5×6. Hasn’t anybody shot the market-maker yet? He deserves it. […]
[…] Today’s response in the preferred market to the new BNS 5.60% Perpetual certainly makes my “frothy” correspondent of January 7 and January 8 look like a genius! The correspondent now feels that (a) long-term, prefs are a buy; (b) short term, it might be better to wait; and (c) if another issue comes out before the new issue settles, take the day off and buy a bottle of something tasty. […]