TD.PF.J Closes Firm on Decent Volume

The Toronto-Dominion Bank’s new issue closed today without a formal announcement from the bank.

TD.PF.J is a FixedReset, 4.70%+270, announced 2018-3-5. It will be tracked by HIMIPref™ and has been assigned to the FixedReset sub-index.

The issue traded 605,636 shares today in a range of 24.94-00 before closing at 24.98-99. Vital statistics are:

TD.PF.J FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-03-14
Maturity Price : 23.15
Evaluated at bid price : 24.98
Bid-YTW : 4.65 %

This issue looks quite expensive to me, according to Implied Volatility Analysis:

impvol_td_180314
Click for Big

We see in this chart many of the same features we saw when reviewing the recent BIP.PR.E, BEP.PR.M, CM.PR.S, NA.PR.E and MFC.PR.Q: the curve is very steep, with Implied Volatility equal to 40% (a ridiculously large figure).

The ludicrously high figure of Implied Volatility is something I take to mean that the underlying assumption of the Black-Scholes model, that of no directionality of prices, is not accepted by the market; the market seems to be taking the view that since things seem rosy now, they will always be rosy and everything will trade near par in the future.

I balk at ascribing a 100% probability to the ‘all issues will be called, or at least exhibit price stability’ hypothesis. There may still be a few old geezers amongst the Assiduous Readers of this blog who can still (faintly) remember the Great Bear Market of 2014-16, in which quite a few similar assumptions made earlier turned out to be slightly inaccurate. The extra cushion implied by an Issue Reset Spread that is well over the market spread is worth something, even if nothing gets called.

According to the analysis shown above, the fair value of this issue is 24.31 (compared to 24.17 on announcement day). Careful Assiduous Readers will note that TD.PF.I, a FixedReset 4.50%+301 that commenced trading 2017-7-14, closed today at 25.24-32 (compared to 25.04-20 on announcement day). The extra 20bp of initial dividend rate is worth $0.05 annually, or a total of a little over $0.20 extra for the new issue … but if they both reset then TD.PF.I will get – to the extent reset rates nine months apart are the same – $0.0775 p.a. more than the new issue. According to the Implied Volatility analysis above, the fair value of TD.PF.I is 25.02 (compared to 24.91 on announcement day).

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