Tapering? Schmapering!
Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.
The editors at Bloomberg make some good points before tapering off into an absurd conclusion:
Together with the exuberant market reaction, though, the Fed’s move demonstrates a problem: Investors still don’t make a distinction between its plans for bond purchases and its pledge to keep short-term interest rates low until after the economy recovers. In futures markets, for example, the expected date of the Fed’s first increase in its interest-rate target immediately moved out by about a month, even though there was no major change in interest-rate policy.
The perception of tapering as a proxy for the Fed’s overall stance on stimulus is unfortunate, because there may be good reasons to taper that are not related to the outlook for the economy. The Fed, for example, might become concerned that the size of its holdings will leave it too exposed to losses or hamper the functioning of markets. As a result, perfectly sensible moves to cut back on bond purchases can send the wrong signal. Alternatively, the desire to manage perceptions can push the Fed into maintaining quantitative easing against its better judgment.
Dan Hallett writes an excellent piece in the Globe titled Investing in floating rate notes? Here’s what the industry isn’t telling you emphasizing the fact that interest rate risk is not the same as credit risk:
While FRNs offer protection against rising rates, the largely-corporate profile of FRN issuers (including a good proportion of below-investment grade companies) means that FRN fund investors are assuming a good deal of credit risk. A significant but less concerning risk is the decreasing returns that would result in a falling interest rate environment.
…
Trimark Floating Rate Income fund lost 27 per cent of its value during the financial crisis – significant but not insurmountable. The fund has fully recovered, having long surpassed its previous peak. But BMO Floating Rate Income fund is different story.BMO’s fund lost nearly half of its value – more than many stock funds – and remains under water as of August 31. Its previous peak is more than seven years into the past. It’s no surprise that BMO Floating Rate Income sports the highest risk rating of its peers.
The Canadian preferred share market roared ahead on the non-tapering news, with PerpetualDiscounts winning 69bp, FixedResets gaining 24bp and DeemedRetractibles up 36bp. The Performance Highlights table is suitably enormous, heavily weighted towards winning Straight Perpetuals. Volume was quite high.
PerpetualDiscounts now yield 5.65%, equivalent to 7.34% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 5.0%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 235bp, a sharp decline from the 250bp reported September 11.
| 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 | -0.7333 % | 2,579.6 |
| FixedFloater | 4.28 % | 3.59 % | 30,159 | 18.13 | 1 | 0.4071 % | 3,880.4 |
| Floater | 2.62 % | 2.88 % | 65,962 | 20.05 | 5 | -0.7333 % | 2,785.3 |
| OpRet | 4.61 % | 1.78 % | 68,748 | 0.53 | 3 | -0.0384 % | 2,644.9 |
| SplitShare | 4.75 % | 4.79 % | 56,208 | 4.07 | 6 | 0.1350 % | 2,946.9 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0384 % | 2,418.5 |
| Perpetual-Premium | 5.85 % | 5.76 % | 114,218 | 3.74 | 2 | 0.1182 % | 2,266.3 |
| Perpetual-Discount | 5.57 % | 5.65 % | 138,343 | 14.25 | 36 | 0.6852 % | 2,334.5 |
| FixedReset | 4.92 % | 3.63 % | 240,623 | 3.49 | 85 | 0.2414 % | 2,461.0 |
| Deemed-Retractible | 5.14 % | 4.66 % | 197,325 | 6.91 | 43 | 0.3592 % | 2,371.1 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| PWF.PR.A | Floater | -1.91 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-18 Maturity Price : 22.78 Evaluated at bid price : 23.06 Bid-YTW : 2.26 % |
| CU.PR.C | FixedReset | -1.57 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2017-06-01 Maturity Price : 25.00 Evaluated at bid price : 25.00 Bid-YTW : 4.08 % |
| TRI.PR.B | Floater | -1.30 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-18 Maturity Price : 22.44 Evaluated at bid price : 22.70 Bid-YTW : 2.28 % |
| SLF.PR.H | FixedReset | -1.19 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2016-09-30 Maturity Price : 25.00 Evaluated at bid price : 24.95 Bid-YTW : 3.95 % |
| RY.PR.C | Deemed-Retractible | -1.15 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.02 Bid-YTW : 4.66 % |
| PWF.PR.E | Perpetual-Discount | 1.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-18 Maturity Price : 23.93 Evaluated at bid price : 24.17 Bid-YTW : 5.77 % |
| PWF.PR.L | Perpetual-Discount | 1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-18 Maturity Price : 22.46 Evaluated at bid price : 22.75 Bid-YTW : 5.68 % |
| GWO.PR.Q | Deemed-Retractible | 1.03 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.60 Bid-YTW : 5.85 % |
| SLF.PR.D | Deemed-Retractible | 1.04 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.30 Bid-YTW : 6.31 % |
| RY.PR.W | Perpetual-Discount | 1.05 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-18 Maturity Price : 24.84 Evaluated at bid price : 25.07 Bid-YTW : 4.92 % |
| PWF.PR.K | Perpetual-Discount | 1.08 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-18 Maturity Price : 22.12 Evaluated at bid price : 22.52 Bid-YTW : 5.56 % |
| SLF.PR.A | Deemed-Retractible | 1.09 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.29 Bid-YTW : 6.10 % |
| GWO.PR.G | Deemed-Retractible | 1.12 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.51 Bid-YTW : 5.95 % |
| IFC.PR.A | FixedReset | 1.18 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.93 Bid-YTW : 4.45 % |
| POW.PR.D | Perpetual-Discount | 1.25 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-18 Maturity Price : 22.21 Evaluated at bid price : 22.63 Bid-YTW : 5.61 % |
| CU.PR.D | Perpetual-Discount | 1.42 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-18 Maturity Price : 23.19 Evaluated at bid price : 23.50 Bid-YTW : 5.24 % |
| SLF.PR.C | Deemed-Retractible | 1.43 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.30 Bid-YTW : 6.31 % |
| MFC.PR.B | Deemed-Retractible | 1.45 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.70 Bid-YTW : 6.33 % |
| IFC.PR.C | FixedReset | 1.46 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2016-09-30 Maturity Price : 25.00 Evaluated at bid price : 25.75 Bid-YTW : 3.13 % |
| CIU.PR.A | Perpetual-Discount | 1.49 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-18 Maturity Price : 21.16 Evaluated at bid price : 21.16 Bid-YTW : 5.49 % |
| GWO.PR.H | Deemed-Retractible | 1.58 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.55 Bid-YTW : 6.07 % |
| SLF.PR.E | Deemed-Retractible | 1.61 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.46 Bid-YTW : 6.28 % |
| CU.PR.F | Perpetual-Discount | 1.62 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-18 Maturity Price : 21.30 Evaluated at bid price : 21.30 Bid-YTW : 5.33 % |
| FTS.PR.F | Perpetual-Discount | 1.69 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-18 Maturity Price : 22.54 Evaluated at bid price : 22.83 Bid-YTW : 5.40 % |
| GWO.PR.I | Deemed-Retractible | 1.73 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.73 Bid-YTW : 6.13 % |
| CU.PR.G | Perpetual-Discount | 1.82 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-18 Maturity Price : 21.30 Evaluated at bid price : 21.30 Bid-YTW : 5.33 % |
| PWF.PR.S | Perpetual-Discount | 1.86 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-18 Maturity Price : 22.15 Evaluated at bid price : 22.50 Bid-YTW : 5.40 % |
| ENB.PR.H | FixedReset | 1.93 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-18 Maturity Price : 22.40 Evaluated at bid price : 23.22 Bid-YTW : 4.42 % |
| GWO.PR.R | Deemed-Retractible | 2.03 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.65 Bid-YTW : 5.97 % |
| ELF.PR.G | Perpetual-Discount | 2.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-18 Maturity Price : 21.52 Evaluated at bid price : 21.52 Bid-YTW : 5.62 % |
| FTS.PR.H | FixedReset | 2.41 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-18 Maturity Price : 21.25 Evaluated at bid price : 21.25 Bid-YTW : 4.23 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| W.PR.H | Perpetual-Discount | 86,200 | RBC crossed blocks of 41,300 and 40,300, both at 23.57. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-18 Maturity Price : 23.32 Evaluated at bid price : 23.60 Bid-YTW : 5.93 % |
| TRP.PR.A | FixedReset | 77,312 | Scotia crossed 50,000 at 25.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-18 Maturity Price : 23.81 Evaluated at bid price : 25.00 Bid-YTW : 3.94 % |
| PWF.PR.R | Perpetual-Discount | 70,583 | TD crossed 55,000 at 24.50. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-18 Maturity Price : 24.25 Evaluated at bid price : 24.65 Bid-YTW : 5.65 % |
| PWF.PR.K | Perpetual-Discount | 69,808 | TD crossed 60,500 at 22.33. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-18 Maturity Price : 22.12 Evaluated at bid price : 22.52 Bid-YTW : 5.56 % |
| PWF.PR.S | Perpetual-Discount | 67,189 | TD crossed 45,000 at 22.35. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-18 Maturity Price : 22.15 Evaluated at bid price : 22.50 Bid-YTW : 5.40 % |
| W.PR.J | Perpetual-Discount | 60,220 | RBC crossed blocks of 40,000 and 17,900 at 24.10. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-18 Maturity Price : 23.92 Evaluated at bid price : 24.16 Bid-YTW : 5.90 % |
| There were 54 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| PWF.PR.A | Floater | Quote: 23.06 – 23.96 Spot Rate : 0.9000 Average : 0.6522 YTW SCENARIO |
| IFC.PR.A | FixedReset | Quote: 23.93 – 24.49 Spot Rate : 0.5600 Average : 0.3161 YTW SCENARIO |
| MFC.PR.D | FixedReset | Quote: 25.75 – 26.10 Spot Rate : 0.3500 Average : 0.2137 YTW SCENARIO |
| TD.PR.A | FixedReset | Quote: 25.34 – 25.70 Spot Rate : 0.3600 Average : 0.2278 YTW SCENARIO |
| GWO.PR.G | Deemed-Retractible | Quote: 23.51 – 23.98 Spot Rate : 0.4700 Average : 0.3380 YTW SCENARIO |
| CU.PR.E | Perpetual-Discount | Quote: 23.20 – 23.60 Spot Rate : 0.4000 Average : 0.2806 YTW SCENARIO |