October 23, 2015

David Parkinson of the Globe points out that headline inflation may not be benign for much longer:

Statistics Canada reported Friday that the consumer price index (CPI) slipped 0.2 per cent in September from August, putting the year-over-year CPI inflation rate at 1 per cent, down from 1.3 per cent the previous month, and the lowest rate since June.

The energy segment of CPI slumped 4.4 per cent in September alone, as the price of gasoline tumbled nearly 8 per cent, reflecting renewed weakness in the oil market. On a year-over-year basis, gasoline is down a remarkable 19 per cent, the main driver in the 11-per-cent decline in the overall energy segment.

Without energy, the year-over-year inflation rate for the rest of Statscan’s consumer basket is 2.1 per cent. And, indeed, it has hovered at or a little above 2 per cent for more than a year now, even as the oil shock delivered a sustained blow to Canada’s overall economic health. Every major segment outside of transportation – which contains gasoline costs – has posted year-over-year inflation well north of the overall CPI reading, with a median reading of 2.5 per cent.

But here’s the thing: That energy effect, which has sucked the life out of CPI inflation for months now, will disappear within the next few months. It’s all but a statistical certainty. It was last fall that energy prices went into their tailspin, and by January they had bottomed; pretty much from here on in, the year-over-year comparisons in the energy segment are going to look much brighter.

In Europe, however, Draghi is more concerned about deflation:

On Thursday in Malta, Draghi said the committees have been given their orders again and that the ECB wanted to be “vigilant,” echoing his predecessor Jean-Claude Trichet’s preferred signal for an imminent policy change. Investors took the hint, sending the euro tumbling and German bond yields to a record low — and economists debating whether policy makers will cut rates, expand QE, do both or even more.

While Draghi reiterated his belief that the 19-nation currency bloc is not in deflation, or a downward spiral of prices and wages, he made clear he’s ready to act to stem what Executive Board member Peter Praet two weeks ago called a “seeping pessimism” in the euro area.

This caused an immediate uptick in my favourite statistice – the value of bonds with negative yields:

With his confirmation that policy makers discussed cutting the region’s deposit rate, Mario Draghi extended the euro area’s negative-yield universe by $190 billion.

Those comments by the European Central Bank chief on Thursday sparked a rally that left yields on German sovereign securities negative for as long as six years, and pushed Spanish and Italian two-year yields below zero. Across the currency bloc, the value of securities issued by governments at negative yields rose to $1.57 trillion, from $1.38 trillion before Draghi spoke, according to data compiled by Bloomberg. That’s equivalent to about a quarter of the market.

Germany’s two-year yield was little changed at minus 0.32 percent as of 4:26 p.m. London time, after earlier reaching a record-low minus 0.348 percent. The price of the zero percent security maturing September 2017 was at 100.605 percent of face value.

French two-year yields dropped to a record minus 0.292 percent on Friday, also below the current level of the deposit rate, which is at minus 0.20 percent. There are about $752 billion of securities in the euro region with yields below that rate, according to data compiled by Bloomberg, making them ineligible for the ECB’s 1.1 trillion-euro ($1.2 trillion) bond-buying plan.

Italy’s two-year yield dropped to as low as minus 0.014 percent on Friday, while Spain’s fell to as low as minus 0.02 percent.

In addition, China cut policy rates again:

China stepped up monetary easing with its sixth interest-rate cut in a year to combat deflationary pressures and a slowing economy, moving ahead of anticipated fresh stimulus by central banks from Europe to Japan and possible tightening in the U.S.

The one-year lending rate will be cut to 4.35 percent from 4.6 percent effective Saturday the People’s Bank of China said on its website on Friday, while the one-year deposit rate will fall to 1.5 percent from 1.75 percent. Reserve requirements for all banks were lowered by 50 basis points, with an extra 50 basis point reduction for some institutions.

The need for new growth engines was underscored by data Monday that showed the economy expanded 6.9 percent in the three months through September from a year earlier. While that beat economists’ estimates for 6.8 percent, the expansion benefited from an out-sized contribution from financial services after a surge in share trading from the year-earlier period. That prop is unlikely to endure, raising challenges to Li’s growth goal of about 7 percent this year.

Meantime, consumer inflation at about half the government’s target and a protracted slump in producer prices added room for additional easing.

This news actually weakened Treasuries:

Treasuries fell, with 10-year note yields touching a two-week high, after China’s central bank lowered its benchmark lending rate and reserve requirements for banks in an effort to curb an economic decline.

U.S. yields rose for a second day as investors see China’s efforts to address its problems as easing turmoil in emerging markets and lessening demand for haven assets.

The yield on the 10-year Treasury note rose six basis points, or 0.06 percentage point, to 2.09 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data, after touching its highest since Oct. 8. The price of the 2 percent U.S. security maturing in August 2025 dropped 17/32, or $5.31 per $1,000 face amount, to 99 7/32.

The move by the Chinese central bank helped bolster risk appetite, with stocks rising around the world and U.S. bond market inflation expectations rising to the highest levels in two weeks, forecasting a rate of 1.52 percent during the next 10 years.

And, all in all, the Central Bankers reclaimed their position as the Masters of the Universe:

Canadian stocks joined a global equities rally sparked by optimism central-bank stimulus will jumpstart growth.

The nation’s benchmark index rose to a two-week high, as Valeant Pharmaceuticals International Inc. halted a four-day rout. Canada’s largest lenders contributed the most to gains, while materials producers also advanced.

Central banks are reasserting dominance over the global financial markets, sparking demand for risk assets, as China’s central bank cut its benchmark lending rate a day after the European Central Bank signaled it will consider bolstering a bond-buying program before the end of the year. Canada’s central bank held rates steady this week.

The Standard & Poor’s/TSX Composite Index rose 75.55 points, or 0.5 percent, to 13,953.66 at 4 p.m. in Toronto. The gauge posted a 0.8 percent gain in the week. It’s extended an October rally to 4.9 percent, on pace for the biggest monthly increase since 2011.

Brompton Lifeco Split Inc., proud issuer of LCS.PR.A, was confirmed at Pfd-4(high) by DBRS:

Based on the dividend yields of the underlying companies in the Portfolio and after management fees and other expenses have been paid, the dividend coverage ratio stands at 0.6 times.

The amount of downside protection available to the Preferred Shares as of October 15, 2015 is 34%.

Since the last review conducted on October 24, 2014, performance of the Company’s preferred shares remains stable. Quarterly Preferred Share distributions have been paid regularly since the inception of the Company in 2007. Other key rating considerations include the credit quality, volatility and diversification of the Portfolio as well as changes in the dividend policies of the underlying companies in the Portfolio.

Based on the aforementioned considerations and performance metrics, DBRS confirms the Pfd-4 (high) rating of the Preferred Shares issued by Brompton Lifeco Split Corp.

There were good solid gains in the Canadian preferred share market today, with PerpetualDiscounts winning 29bp, FixedResets gaining 24bp and DeemedRetractibles up 27bp. As has become normal, however, these figures masked a lot of churn illustrated by a lengthy Performance Highlights table. Volume was average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

impVol_TRP_151023
Click for Big

Implied Volatility increased today with a good fit, but the pattern of fitting errors makes me suspect that the figure is subject to rapid change on small pricing shifts.

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 18.75 to be $0.45 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.34 cheap at its bid price of 13.37.

impVol_MFC_151023
Click for Big

Implied Volatility declined slightly for the MFC series today.

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 19.34 to be 0.42 rich, while MFC.PR.F resetting at +141bp on 2016-6-19, is bid at 14.00 to be 0.64 cheap.

impVol_BAM_151023
Click for Big

The fit on the BAM issues continues to be poor. Implied Volatility remained constant today, but this is a figure that’s very highly dependent on the performance of the high-spread issue BAM.PF.H.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.75 to be $1.18 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 21.60 and appears to be $0.82 rich.

impVol_FTS_151023
Click for Big

Implied Volatility declined significantly today.

FTS.PR.K, with a spread of +205bp, and bid at 19.50, looks $0.99 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 14.11 and is $0.61 cheap.

pairs_FR_151023
Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.87%, with one outlier above 0.00%. The distribution is bimodal, with bank NVCC non-compliant pairs averaging -1.28% and other issues averaging -0.30%. There are three junk outliers above 0.00% and one below -2.00%.

pairs_FF_151023
Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

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 -0.0301 % 1,739.3
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.0301 % 3,041.0
Floater 4.27 % 4.33 % 61,279 16.75 3 -0.0301 % 1,849.0
OpRet 0.00 % 0.00 % 0 0.00 0 -0.2519 % 2,745.3
SplitShare 4.37 % 5.25 % 78,870 2.96 5 -0.2519 % 3,217.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.2519 % 2,510.3
Perpetual-Premium 5.87 % 5.83 % 67,092 14.03 5 0.1042 % 2,478.8
Perpetual-Discount 5.66 % 5.71 % 80,137 14.30 33 0.2852 % 2,523.7
FixedReset 4.92 % 4.45 % 204,323 15.82 76 0.2448 % 2,076.0
Deemed-Retractible 5.23 % 5.05 % 107,822 5.47 33 0.2658 % 2,554.1
FloatingReset 2.50 % 4.04 % 63,840 5.82 9 0.4465 % 2,155.5
Performance Highlights
Issue Index Change Notes
SLF.PR.G FixedReset -2.85 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 15.01
Bid-YTW : 8.66 %
IFC.PR.A FixedReset -2.38 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.01
Bid-YTW : 8.94 %
MFC.PR.F FixedReset -2.17 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 14.00
Bid-YTW : 9.81 %
TRP.PR.G FixedReset -1.80 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 21.29
Evaluated at bid price : 21.29
Bid-YTW : 4.52 %
HSE.PR.C FixedReset -1.74 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 21.67
Evaluated at bid price : 22.00
Bid-YTW : 4.67 %
FTS.PR.H FixedReset -1.67 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 14.11
Evaluated at bid price : 14.11
Bid-YTW : 4.19 %
BAM.PF.F FixedReset -1.67 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 21.21
Evaluated at bid price : 21.21
Bid-YTW : 4.59 %
BAM.PF.A FixedReset -1.58 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 21.16
Evaluated at bid price : 21.16
Bid-YTW : 4.59 %
GWO.PR.N FixedReset -1.35 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 13.85
Bid-YTW : 9.63 %
MFC.PR.G FixedReset -1.31 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.86
Bid-YTW : 5.66 %
BIP.PR.A FixedReset -1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 21.32
Evaluated at bid price : 21.60
Bid-YTW : 5.15 %
IAG.PR.G FixedReset -1.11 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.43
Bid-YTW : 5.89 %
BAM.PR.T FixedReset -1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 18.03
Evaluated at bid price : 18.03
Bid-YTW : 4.57 %
BNS.PR.O Deemed-Retractible -1.05 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-04-27
Maturity Price : 25.25
Evaluated at bid price : 25.50
Bid-YTW : 3.31 %
MFC.PR.H FixedReset -1.02 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.19
Bid-YTW : 5.14 %
HSE.PR.A FixedReset -1.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 13.86
Evaluated at bid price : 13.86
Bid-YTW : 4.77 %
CU.PR.E Perpetual-Discount 1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 21.63
Evaluated at bid price : 21.91
Bid-YTW : 5.67 %
SLF.PR.C Deemed-Retractible 1.04 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.43
Bid-YTW : 7.28 %
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 : 20.32
Bid-YTW : 7.35 %
GWO.PR.R Deemed-Retractible 1.16 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.80
Bid-YTW : 6.76 %
TD.PF.C FixedReset 1.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 19.15
Evaluated at bid price : 19.15
Bid-YTW : 4.23 %
TD.PF.A FixedReset 1.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 19.33
Evaluated at bid price : 19.33
Bid-YTW : 4.21 %
CU.PR.H Perpetual-Discount 1.24 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 23.30
Evaluated at bid price : 23.60
Bid-YTW : 5.67 %
BNS.PR.R FixedReset 1.32 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.63
Bid-YTW : 3.58 %
BMO.PR.Y FixedReset 1.33 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 21.71
Evaluated at bid price : 22.09
Bid-YTW : 4.17 %
CM.PR.O FixedReset 1.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 19.73
Evaluated at bid price : 19.73
Bid-YTW : 4.20 %
MFC.PR.B Deemed-Retractible 1.34 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.21
Bid-YTW : 7.00 %
NA.PR.W FixedReset 1.41 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 19.36
Evaluated at bid price : 19.36
Bid-YTW : 4.22 %
CU.PR.G Perpetual-Discount 1.49 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 20.40
Evaluated at bid price : 20.40
Bid-YTW : 5.61 %
RY.PR.H FixedReset 1.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 19.38
Evaluated at bid price : 19.38
Bid-YTW : 4.19 %
CM.PR.P FixedReset 1.53 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 19.29
Evaluated at bid price : 19.29
Bid-YTW : 4.20 %
TD.PR.T FloatingReset 1.53 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.54
Bid-YTW : 3.67 %
BMO.PR.W FixedReset 1.54 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 19.14
Evaluated at bid price : 19.14
Bid-YTW : 4.26 %
NA.PR.Q FixedReset 1.60 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.75
Bid-YTW : 3.60 %
BAM.PF.C Perpetual-Discount 1.62 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 20.75
Evaluated at bid price : 20.75
Bid-YTW : 5.91 %
BMO.PR.S FixedReset 1.63 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 19.94
Evaluated at bid price : 19.94
Bid-YTW : 4.23 %
TRP.PR.C FixedReset 1.67 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 13.37
Evaluated at bid price : 13.37
Bid-YTW : 4.46 %
RY.PR.Z FixedReset 1.69 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 19.30
Evaluated at bid price : 19.30
Bid-YTW : 4.16 %
PWF.PR.S Perpetual-Discount 1.73 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 21.42
Evaluated at bid price : 21.75
Bid-YTW : 5.53 %
RY.PR.M FixedReset 1.78 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 20.59
Evaluated at bid price : 20.59
Bid-YTW : 4.24 %
MFC.PR.J FixedReset 1.84 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.08
Bid-YTW : 5.90 %
TD.PF.B FixedReset 1.85 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 19.30
Evaluated at bid price : 19.30
Bid-YTW : 4.21 %
SLF.PR.J FloatingReset 2.00 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 13.80
Bid-YTW : 9.05 %
MFC.PR.K FixedReset 2.05 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.46
Bid-YTW : 6.64 %
MFC.PR.L FixedReset 2.06 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.34
Bid-YTW : 6.81 %
FTS.PR.K FixedReset 2.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 19.50
Evaluated at bid price : 19.50
Bid-YTW : 4.00 %
FTS.PR.M FixedReset 2.32 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 20.76
Evaluated at bid price : 20.76
Bid-YTW : 4.25 %
FTS.PR.G FixedReset 2.45 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 18.80
Evaluated at bid price : 18.80
Bid-YTW : 4.18 %
Volume Highlights
Issue Index Shares
Traded
Notes
TRP.PR.D FixedReset 80,078 Desjardins crossed 55,800 at 18.35.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 18.45
Evaluated at bid price : 18.45
Bid-YTW : 4.57 %
IFC.PR.A FixedReset 59,500 Desjardins crossed 56,300 at 15.85.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.01
Bid-YTW : 8.94 %
NA.PR.W FixedReset 47,830 Desjardins crossed 40,000 at 19.36.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 19.36
Evaluated at bid price : 19.36
Bid-YTW : 4.22 %
RY.PR.H FixedReset 46,509 TD crossed 20,000 at 19.20.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 19.38
Evaluated at bid price : 19.38
Bid-YTW : 4.19 %
RY.PR.P Perpetual-Discount 31,180 RBC bought 14,900 from Scotia at 24.59.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 24.15
Evaluated at bid price : 24.51
Bid-YTW : 5.39 %
RY.PR.Z FixedReset 31,070 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 19.30
Evaluated at bid price : 19.30
Bid-YTW : 4.16 %
There were 34 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
MFC.PR.F FixedReset Quote: 14.00 – 14.66
Spot Rate : 0.6600
Average : 0.4506

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 14.00
Bid-YTW : 9.81 %

HSE.PR.A FixedReset Quote: 13.86 – 14.45
Spot Rate : 0.5900
Average : 0.3905

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 13.86
Evaluated at bid price : 13.86
Bid-YTW : 4.77 %

BAM.PR.X FixedReset Quote: 15.25 – 15.91
Spot Rate : 0.6600
Average : 0.4791

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 15.25
Evaluated at bid price : 15.25
Bid-YTW : 4.65 %

FTS.PR.J Perpetual-Discount Quote: 21.50 – 21.99
Spot Rate : 0.4900
Average : 0.3354

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 21.50
Evaluated at bid price : 21.50
Bid-YTW : 5.62 %

FTS.PR.F Perpetual-Discount Quote: 22.00 – 22.54
Spot Rate : 0.5400
Average : 0.4379

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 21.75
Evaluated at bid price : 22.00
Bid-YTW : 5.65 %

TD.PF.F Perpetual-Discount Quote: 22.65 – 22.99
Spot Rate : 0.3400
Average : 0.2393

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-10-23
Maturity Price : 22.36
Evaluated at bid price : 22.65
Bid-YTW : 5.42 %

5 Responses to “October 23, 2015”

  1. bbarberayr says:

    What do you mean by “Hard Maturity”?

    When I look at the prospectus for IFC.PR.A, it states

    “The Series 1 Preferred Shares and the Series 2 Preferred Shares do not have a fixed maturity date and are not redeemable at the option of the holders thereof.”

    Thank you.

  2. jiHymas says:

    On PrefBlog, “Hard Maturity” and “Deemed Maturity” are synonymous. There is a brief explanation of the latter term under “Deemed Retractibles” on the PrefLetter format page.

    A “Deemed Maturity” is the assumption that the issue will be redeemed because it will no longer be eligible for inclusion in Tier 1 Capital as it is NVCC non-compliant. From the issuer’s perspective this means the preferred share issue is no longer ‘cheap equity’ but has become ‘expensive debt’ and therefore that prudence demands redemption.

    This assumption is widely made in the analysis of bank NVCC issues, for which OSFI has issued an advisory. It is not widely made in the case of insurance issues, such as IFC.PR.A, for which no such advisory has been issued. The addition of a “Deemed Maturity” entry to the call schedule is the result of my analysis, which I justify in PrefLetter but, as I say, my analysis is not widely accepted. We shall just have to see how things turn out!

  3. nebulousanalyst says:

    Its great that you’ve taken a stance on the NVCC rules potentially filtering to the insurance sector – its a very important consideration. This seems like a brilliant tie breaker – if you’re looking at similar yield and risk profile prefs, an insurance co pref trading below par gives you an attractive option on a potential NVCC ruling. You have to love a free option.

    I’m not currently a subscriber and I’m sure you’ve covered it in you letters (sorry if this oversteps somehow). IMHO – it is worth remembering that from a risk perspective, assuming a 2025 redemption underestimates sensitivity. These issues still have the duration of a perpetual variable rate security until they officially don’t.

  4. bbarberayr says:

    Thank you for that information. That is a good explanation and makes sense.

  5. jiHymas says:

    You have to love a free option.

    It’s not quite free, from what I can make out, but it’s certainly quite cheap!

    I’m not currently a subscriber

    I am shocked. Shocked and appalled. I always considered you to be a nebulous analyst of taste.

    IMHO – it is worth remembering that from a risk perspective, assuming a 2025 redemption underestimates sensitivity. These issues still have the duration of a perpetual variable rate security until they officially don’t.

    Yes, in PrefLetter I always publish a few good charts showing how returns and risk profiles have differed between bank and insurance issues, in both the current month and one or two fairly dramatic prior months.

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