Vasco Cúrdia (San Francisco Fed) and Andrea Ferrero (New York Fed) write a provocative note titled How Stimulatory Are Large-Scale Asset Purchases?:
In November 2010, the Fed’s policy committee, the Federal Open Market Committee (FOMC), announced a program to purchase $600 billion of long-term Treasury securities, the second of a series of large-scale asset purchases (LSAPs). The program’s goal was to boost economic growth and put inflation at levels more consistent with the Fed’s maximum employment and price stability mandate. In Chen, Cúrdia, and Ferrero (2012), we estimate that the second LSAP program, known as QE2, added about 0.13 percentage point to real GDP growth in late 2010 and 0.03 percentage point to inflation.
Our analysis suggests that forward guidance is essential for quantitative easing to be effective. Without forward guidance, QE2 would have added only 0.04 percentage point to GDP growth and 0.02 to inflation. Under conventional monetary policy, higher economic growth and inflation would usually lead the Fed to raise interest rates, offsetting the effects of LSAPs. Forward guidance during QE2 mitigated that factor by making it clear that the federal funds rate was not likely to increase.
Our estimates suggest that the effects of a program like QE2 on GDP growth are smaller and more uncertain than a conventional policy move of temporarily reducing the federal funds rate by 0.25 percentage point. In addition, our analysis suggests that communication about when the Fed will begin to raise the federal funds rate from its near-zero level will be more important than signals about the precise timing of the end of QE3, the current round of LSAPs.
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The second feature in our model concerns the transmission from the risk premium to the economy. We consider an economy with two types of investors. The first can invest in both short- and long-term assets. For them, a lower risk premium prompts them to reallocate their portfolios, but doesn’t change their spending behavior. If all investors behaved this way, a change in the risk premium would not affect the economy.The second type of investor buys only long-term bonds, for example to match asset duration with life events, such as retirement date. If long-term yields fall, these investors have less incentive to save and may allocate more money to consumption or investment in nonfinancial assets. This boosts aggregate demand and puts upward pressure on inflation.
These two types of investors represent a form of financial market segmentation, allowing for the risk premium to affect economic activity. The degree of segmentation is determined by what fraction of investors buy only long-term bonds. The higher the proportion of such investors, the more LSAPs affect the real economy.
…
Asset purchase programs like QE2 appear to have, at best, moderate effects on economic growth and inflation. Research suggests that the key reason these effects are limited is that bond market segmentation is small. Moreover, the magnitude of LSAP effects depends greatly on expectations for interest rate policy, but those effects are weaker and more uncertain than conventional interest rate policy. This suggests that communication about the beginning of federal funds rate increases will have stronger effects than guidance about the end of asset purchases.
I don’t find it entirely convincing but it is, after all, only a letter. Consider the first type of investor, the non-segmented one:
The first can invest in both short- and long-term assets. For them, a lower risk premium prompts them to reallocate their portfolios, but doesn’t change their spending behavior. If all investors behaved this way, a change in the risk premium would not affect the economy.
OK, so they reallocate their portfolios, but what do they buy? And, more importantly, what do the people they buy from do with their money?
One thing that they buy on reallocation, of course, is Apple Corporation bonds. Apple doesn’t need the money, they just stick it in the bank. No gain there. What does the bank do with the money? Ideally, they would lend it to a smaller business – or an expanding business – which will then buy equipment, hire staff, and produce YouTube videos of kittens and make immense profits.
But that’s kind of risky, so what they do – especially in Canada – is lend the money to government employees so they can buy larger houses. There’s not really all that much of a gain there, either.
I really have trouble conceptualizing the path of monetary stimulus throughout the economy, but I find it hard to believe that the asset reallocation of Investor #1 has zero effect, although I’m willing to believe that it may be small. I will also suggest that there is a third type of investor, such as pension funds and insurance companies, that get hurt to some extent (depending on how well they are hedged) by lower yields and actually have to reduce distributions and increase contributions when yields fall. Negative convexity! I hesitate to estimate the importance of this group, though – it might be just a rounding error.
Another problem is the nature of business today. How much capital do businesses really need in order to make their widgets? It’s not like the 1950’s, where you had to build a factory and the factory needed steel, so somebody else had to build a foundry. While capital is still needed – remember the price-tag on the Energy East pipeline? – I suggest that it is less important than it used to be.
I mean, look at my business! I would love to expand and I will, as soon as enough of youse guys get off your duffs and send me large quantities of money to manage. So what do I need to expand? A few computers … technically a capital expense, but in business terms it’s petty cash. Premises – that will come out of revenue. Salaries – that will come out of revenue. What do I need capital for? My decision as to whether to expand or not has absolutely nothing to do with the Prime Rate.
There are two types of business to be in: you can make things, or you can make entertainment. Entertainment (more formally, “services”) is not all that much capital intensive, and entertainment is taking over the economy. So how can you stimulate an economy with money if the system doesn’t need money? At least not directly. One might object – particularly if you are an economics lecturer hoping for tenure – that it does need education and therefore tenured professors and therefore lots of money. But, I say to that, we’re already saturated in education. It’s a very tricky question and someday I’ll take a rock-solid economics course so I can get a better handle on things.
Maybe my economics course should start with a piece from S&P titled Repeat After Me: Banks Cannot And Do Not “Lend Out” Reserves:
- Many talk as if banks can “lend out” their reserves, raising concerns that massive excess reserves created by QE could fuel runaway credit creation and inflation in the future. But banks cannot lend their reserves directly to commercial borrowers, so this concern is misplaced.
- Banks do need to hold reserves (as a liquidity buffer) against their deposits, and banks create deposits when they lend. But normally banks are not reserve constrained, so excess reserves do not loosen a reserve constraint.
- Banks in aggregate can reduce their reserves only to the extent that they initiate new lending and the bank deposits created as a result flow into the economy as new banknotes as the public demands more of them.
- QE does aim to ease financial conditions and spur more bank lending than otherwise would have occurred, but the mechanisms by which this happens are much more subtle and indirect than commonly implied.
- If the excess reserves created by QE were to be associated with too much credit creation, central banks could readily extinguish them.
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To understand the first issue, note the composition of a central bank’s balance sheet (see table 1) and note an identity linking the two sides. Abstracting from the central bank’s capital (5) and some other possible minor items, the central bank balance sheet identity is:Assets (A) = Reserves (R) + Banknotes in circulation (BK) + Government deposits (GD).
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There you have it. This being an identity and reserves being a liability of the central bank, their aggregate level can change in three, and only three, ways (6). Reserves go up (or down) when:(1) The central bank increases (decreases) its assets;
(2) The public decreases (increases) the amount of cash (banknotes) it wants to hold;
(3) The government reduces (increases) its deposits at the central bank because it makes net transfers to (receives net transfers from) the private sector (7).
Most importantly, banks cannot cause the amount of reserves at the central bank to fall by “lending them out” to customers. That possibility is not allowed for in the identity because bank lending does not enter into it. Assuming that the public does not change its demand for cash and the government does not make any net payments to the private sector (two things that are both beyond the direct control of the banks and the central bank), bank reserves have to remain “parked” at the central bank. To express wonder that banks don’t lend out their reserves or that they park them at the central bank is to fundamentally misunderstand the balance-sheet mechanics of credit creation and how QE works.
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None of this is to say that the unwinding of QE and other nonconventional policies will be smooth and will not cause volatility in financial markets. Volatility is to be expected and needs to be managed both by policymakers and by market participants. But fears that banks stand to “lend out” the excess reserves that they currently have “parked” at central banks is not something that anyone, least of all central banks aiming to speed up the recovery or defend their inflation targets today, should worry about. I doubt that Keynes would have.
There’s an interesting piece on Bloomberg about the Fed Governor Sweepstakes … it seems my preference for Summers is not widely shared:
Federal Reserve Vice Chairman Janet Yellen is the most qualified and most likely candidate to run the central bank, according to the majority of private economists in a Bloomberg News survey that showed Lawrence Summers trailing by wide margins in both categories.
Sixty-five percent said Yellen probably will be President Barack Obama’s selection to replace Chairman Ben S. Bernanke, while 53 percent said she would do the best job, according to an Aug. 9-13 poll of 63 economists. Twenty-five percent said Summers, Obama’s former top economic adviser, would be the nominee, while 10 percent said he would be best. Six percent said former Fed Vice Chairman Donald Kohn is most likely choice.
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Ward McCarthy, chief financial economist at Jefferies Group LLC in New York, said that Summers isn’t the best pick because he hasn’t served at the central bank and “has no experience with monetary policy.”
‘
“This is an important job, and as brilliant as he may be I don’t think this is a time for on-the-job training,” McCarthy said. Yellen and Kohn both “are the perfect choices for Fed chairman,” said McCarthy, a former Richmond Fed economist.“They’re very credible,” he said. “They’re also very familiar with what the Fed is doing now so there’s no learning curve. They’ve committed their lives to monetary policy so there’s an accumulated body of knowledge and understanding and expertise that’s unparalleled.”
It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts down 48bp, FixedResets up 23bp and DeemedRetractibles gaining 12bp. There was no clear pattern in the Performance Highlights table, except that there were a fair number of PerpetualDiscounts in the bad part. Volume was very high.
PerpetualDiscounts now yield 5.73%, equivalent to 7.45% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.75%, so the pre-tax interest-equivalent spread is now about 270bp, a slight (and perhaps spurious) increase from the 265bp recorded August 7 but well above the post-Crunch, pre-Tapering average of around 200bp.
| 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 | 0.0485 % | 2,643.0 |
| FixedFloater | 4.44 % | 3.71 % | 29,937 | 17.90 | 1 | -1.6092 % | 3,740.6 |
| Floater | 2.54 % | 2.84 % | 72,145 | 20.11 | 5 | 0.0485 % | 2,853.7 |
| OpRet | 4.64 % | 3.64 % | 75,249 | 2.22 | 3 | 0.3691 % | 2,608.9 |
| SplitShare | 4.69 % | 4.58 % | 53,983 | 4.12 | 6 | -0.0511 % | 2,954.5 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.3691 % | 2,385.6 |
| Perpetual-Premium | 5.74 % | 5.84 % | 94,235 | 14.13 | 12 | -0.2038 % | 2,257.4 |
| Perpetual-Discount | 5.66 % | 5.73 % | 153,929 | 14.28 | 25 | -0.4760 % | 2,279.8 |
| FixedReset | 5.04 % | 3.85 % | 237,445 | 4.31 | 85 | 0.2328 % | 2,423.2 |
| Deemed-Retractible | 5.22 % | 5.21 % | 189,357 | 6.95 | 43 | 0.1185 % | 2,317.5 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| GWO.PR.R | Deemed-Retractible | -2.32 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.71 Bid-YTW : 6.02 % |
| BAM.PR.X | FixedReset | -2.25 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-14 Maturity Price : 21.40 Evaluated at bid price : 21.72 Bid-YTW : 4.39 % |
| FTS.PR.J | Perpetual-Discount | -2.25 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-14 Maturity Price : 21.30 Evaluated at bid price : 21.60 Bid-YTW : 5.50 % |
| TRP.PR.D | FixedReset | -1.86 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-14 Maturity Price : 22.63 Evaluated at bid price : 23.75 Bid-YTW : 4.28 % |
| FTS.PR.F | Perpetual-Discount | -1.64 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-14 Maturity Price : 22.17 Evaluated at bid price : 22.17 Bid-YTW : 5.55 % |
| BAM.PR.G | FixedFloater | -1.61 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-14 Maturity Price : 21.85 Evaluated at bid price : 21.40 Bid-YTW : 3.71 % |
| BAM.PR.N | Perpetual-Discount | -1.39 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-14 Maturity Price : 19.80 Evaluated at bid price : 19.80 Bid-YTW : 6.10 % |
| PWF.PR.R | Perpetual-Discount | -1.33 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-14 Maturity Price : 23.43 Evaluated at bid price : 23.77 Bid-YTW : 5.82 % |
| POW.PR.D | Perpetual-Discount | -1.30 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-14 Maturity Price : 22.50 Evaluated at bid price : 22.75 Bid-YTW : 5.55 % |
| IAG.PR.F | Deemed-Retractible | -1.18 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2019-03-31 Maturity Price : 25.00 Evaluated at bid price : 25.20 Bid-YTW : 5.93 % |
| BAM.PR.M | Perpetual-Discount | -1.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-14 Maturity Price : 20.05 Evaluated at bid price : 20.05 Bid-YTW : 6.02 % |
| ELF.PR.G | Perpetual-Discount | -1.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-14 Maturity Price : 21.26 Evaluated at bid price : 21.26 Bid-YTW : 5.65 % |
| GWO.PR.N | FixedReset | -1.01 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.50 Bid-YTW : 4.90 % |
| NA.PR.M | Deemed-Retractible | 1.06 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2017-05-15 Maturity Price : 25.00 Evaluated at bid price : 25.80 Bid-YTW : 5.08 % |
| CU.PR.C | FixedReset | 1.18 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-14 Maturity Price : 23.20 Evaluated at bid price : 24.80 Bid-YTW : 4.07 % |
| MFC.PR.I | FixedReset | 1.20 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2017-09-19 Maturity Price : 25.00 Evaluated at bid price : 25.40 Bid-YTW : 4.17 % |
| ENB.PR.F | FixedReset | 1.20 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-14 Maturity Price : 22.64 Evaluated at bid price : 23.67 Bid-YTW : 4.39 % |
| ENB.PR.B | FixedReset | 1.20 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-14 Maturity Price : 22.70 Evaluated at bid price : 23.63 Bid-YTW : 4.32 % |
| TD.PR.P | Deemed-Retractible | 1.25 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.16 Bid-YTW : 5.22 % |
| SLF.PR.H | FixedReset | 1.31 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.06 Bid-YTW : 4.42 % |
| RY.PR.B | Deemed-Retractible | 1.40 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.60 Bid-YTW : 4.94 % |
| CIU.PR.B | FixedReset | 1.43 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-01 Maturity Price : 25.00 Evaluated at bid price : 25.57 Bid-YTW : 3.42 % |
| MFC.PR.F | FixedReset | 1.53 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.25 Bid-YTW : 4.34 % |
| BNS.PR.P | FixedReset | 1.57 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2018-04-25 Maturity Price : 25.00 Evaluated at bid price : 24.59 Bid-YTW : 3.78 % |
| BAM.PF.D | Perpetual-Discount | 1.72 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-14 Maturity Price : 20.65 Evaluated at bid price : 20.65 Bid-YTW : 6.05 % |
| TD.PR.S | FixedReset | 1.73 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.69 Bid-YTW : 3.57 % |
| TRP.PR.B | FixedReset | 3.65 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-14 Maturity Price : 21.30 Evaluated at bid price : 21.30 Bid-YTW : 3.73 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| IFC.PR.C | FixedReset | 71,200 | Scotia crossed 53,000 at 24.85. YTW SCENARIO Maturity Type : Call Maturity Date : 2016-09-30 Maturity Price : 25.00 Evaluated at bid price : 25.01 Bid-YTW : 4.39 % |
| PWF.PR.S | Perpetual-Discount | 70,240 | Scotia crossed 49,800 at 22.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-14 Maturity Price : 21.73 Evaluated at bid price : 22.02 Bid-YTW : 5.48 % |
| IFC.PR.A | FixedReset | 63,425 | Scotia crossed 53,900 at 24.44. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.34 Bid-YTW : 4.17 % |
| CU.PR.C | FixedReset | 53,040 | TD crossed 24,700 at 24.75. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-14 Maturity Price : 23.20 Evaluated at bid price : 24.80 Bid-YTW : 4.07 % |
| BAM.PF.D | Perpetual-Discount | 36,669 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-14 Maturity Price : 20.65 Evaluated at bid price : 20.65 Bid-YTW : 6.05 % |
| BNS.PR.M | Deemed-Retractible | 35,390 | TD crossed 24,000 at 24.15. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.08 Bid-YTW : 5.09 % |
| There were 59 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| MFC.PR.K | FixedReset | Quote: 24.04 – 24.58 Spot Rate : 0.5400 Average : 0.3414 YTW SCENARIO |
| GWO.PR.G | Deemed-Retractible | Quote: 23.50 – 23.99 Spot Rate : 0.4900 Average : 0.2988 YTW SCENARIO |
| HSE.PR.A | FixedReset | Quote: 22.90 – 23.44 Spot Rate : 0.5400 Average : 0.4050 YTW SCENARIO |
| TRP.PR.D | FixedReset | Quote: 23.75 – 24.09 Spot Rate : 0.3400 Average : 0.2056 YTW SCENARIO |
| MFC.PR.F | FixedReset | Quote: 23.25 – 23.60 Spot Rate : 0.3500 Average : 0.2197 YTW SCENARIO |
| CU.PR.C | FixedReset | Quote: 24.80 – 25.27 Spot Rate : 0.4700 Average : 0.3449 YTW SCENARIO |
I’m completely mystified by the economic and psychological underpinnings of the recent drop not only in Canadian Rate Resets but US Preferred Shares. Of course I understand the supposed link between the expectation of higher interest rates, duration and fixed income instruments. But this is not the “Old Normal”.
Most investors I know make these type of investments for relatively safe and consistent cash flow. And most of the Rate Resets and Preferreds have interest rates that will probably exceed Fed or Canadian Central Bank rates for the next 3-5 years.
So my question is, why is anyone selling and taking a loss? And who is driving these relatively low volume stocks down in price and for what purpose? Any thoughts?
It makes no sense to me.
So my question is, why is anyone selling and taking a loss?
The same reason that was effective during the Credit Crunch: blind fear. There’s also a sense of betrayal: many people bought FixedResets assuming that the Reset mechanism guaranteed a $25 price every five years and a tight range in the interim. When they see these things trading at $22, they feel betrayed and sell before it gets any worse.
As for Straight Perpetuals – well, I think there are many who believe that a return to prices in the high teens is inevitable.
And who is driving these relatively low volume stocks down in price and for what purpose?
When a stock is low volume it doesn’t take a lot of selling pressure to take it down – just one more reason why we don’t have to worry about shorts, not that there’s any reason to worry about shorts anyway.
The downdraft is retail-driven. Their purpose is to avoid further losses that they consider inevitable. There’s no conspiracy.
You hit on my point exactly. If I have a virtually guaranteed income stream and $25 redemption guaranteed at maturity and almost no chance of seeing interest rates higher then 4%-6% over the next 3-7 years on alternative investments why take a loss for no reason at all?
And US Preferreds have even been hit harder.
So is this a case of “be greedy when others are scared”?
If I have … $25 redemption guaranteed at maturity
That’s a big if! Remember that FixedResets are also perpetual instruments – the reset mechanism addresses interest-rate risks, but not credit risk (or credit spread risk, if you choose to consider that separately).
So is this a case of “be greedy when others are scared”?
Ooooh, that’s market timing! No opinion.
I will go so far as to say that preferred shares are more attractive relative to bonds than they have been for some time.
apparently, REITS are getting hit badly too.. and the experts can’t figure out why..
“Streetwise: REIT valuations baffle Bay Street as yields rise” (globe&mail)
I’ve watched a few US REIT ETF and Mutual Fund stellar performers get tripped up badly over the last 30 days or so. Fortunately I didn’t jump in at that moment.
As far as credit risk…. nothing appears to be truly safe anymore from insured banks in the EU to Sovereign debt anywhere….I guess the best you can do is to make choices where to big or embarrassing to fail mitigates risk or the service being provided by the corporation is essential to a large enough group of people that some type of intervention would be likely if the company needed to be saved. So in my mind that is a top 5 bank or utility verses a BAM or Insurance company.
Hi all,
Well, the long bond closed Friday @ 3.18%, and many of the straight prefs dropped another half buck in response (staying with MFC.PR.B, SLF.PR.D, and WN.PR.E as examples . . . all now trading just over $20/sh).
James is right about many believing a return to the teens is inevitable. Contrary to popular belief here, I’m actually not one of them . . . yet . . . unless the long bond gets to 3.5. This will possibly happen very abrubtly, and probably briefly, when the Fed makes it’s declaration re: tapering. If those stars stay in line for September as the media seems to believe, and the long bond continues to drift in the interim . . . then straight prefs such as the ones in my example will be trading in the mid to high teens sometime in mid September.
Have some cash ready, because the buying opp will be short lived.
Sincere apologies for this focused market timing comment, James . . . but coolmesh was looking for an answer to, “be greedy when others are scared?”, and my answer to that in the case of these prefs is clearly . . . yes (but wait about 3 weeks!).
Thanks Nervousone……If you are nervousone I’m clearly nervoustwo. Its times like this that make me wonder whether life is too long or too short. I find trying to second guess an irrational perhaps rigged market for going on five years tiresome at best. But unlike the 1% I have no choice because I can’t live on 2%.
Not to worry, coolmesh . . . The general theme James puts out with consistency here is that pref share investing, although often filled with irrational seeming market behaviour, is pretty sane if you remember a few basic points –> the underlying security, if you’ve invested in sound issuers, will ultimately retain it’s value over the so-called long term. In the meantime, you are being paid a yield that you can pretty much count on based on your original purchase price.
For me, I’m less patient with the antics of the market, and still having a hard time losing the “paper” situation surrounding pref pricing during the “credit crunch” a few years ago. However, this volatility does create opportunity, and there appears to be a ‘perfect storm” of buying opportunity being created for serious pref investors. Hang in there with your dividend-secure holdings for now, and if possible, accumulate some cash wherever you can, and wait for September. If prefs such as the ones I used as examples above start to trade below $20, they will represent very nice “market timing” type of buys in my opinion.
In the meantime, try not to look very deeply at the “account value” line on your statement.
a p.s. to Nestor on REITS . . . Prefs seem to trade off the long bond, only with more volatility due to wider spreads and lower volume. REITS are at least one category lower than prefs in the same food chain, therefore, it is only logical that if the long bond yield is rising, and pref prices are falling, that REIT prices will get hit harder than both of those. The only thing I’m not sure about is the market timing item around these. Could be buyable mid Sept like prefs, but maybe not . . . also, you have to live with the possibility of a Jim Flaherty “income trust debacle” when you hold these. He could wipe out 30 – 40% of the value of the entire category with one press release like the famous Hallowe’en 2006 masterpiece. Caution on REITS for sure.
[…] PerpetualDiscounts now yield 5.91%, equivalent to 7.68% interest at the standard conversion factor of 1.3x. Long corporates now yield about 4.9%, so the pre-tax interest-equivalent spread (in this context, the Seniority Spread) is now about 280bp, another significant increase from the 270bp reported August 14. […]