August 26, 2016

There was some moderately hawkish Fed chatter today:

Federal Reserve Chair Janet Yellen still has faith.

On Friday she expressed confidence that tighter labor markets over time will push inflation back to the central bank’s 2 percent goal, setting up a rate hike this year — possibly as soon as next month — if jobs data remain strong. That view breaks with a minority group of Fed officials who are more pessimistic about the relationship between labor markets and prices.

Ending two months of public silence about her views, Yellen cited “continued solid performance of the labor market” and said the “case for an increase in the federal funds rate has strengthened in recent months” in her speech Friday to central bankers and economists in Jackson Hole, Wyoming.

Stocks initially rose after Yellen’s remarks, only to decline after Stanley Fischer, the Fed’s vice chairman, reiterated in an interview on CNBC that the possibility exists for two rate increases this year, starting as soon as September.

Yellen’s remarks also signaled she didn’t need to see actual inflation rising toward 2 percent to raise interest rates. She said inflation would reach their 2 percent target “over the next couple of years,” and emphasized that gradual, timely moves were required “to achieve and sustain employment and inflation near our statutory objectives.”

So for what it’s worth – and remember, you’re reading this for free – I think that for the next year or so Fed hikes will be of the ‘one and done’ variety, rather than the steady increase variety. But eventually (probably after the Fed Rate has struggled carefully and cautiously to 1% and above) there will be a series of hikes, bang, bang, bang, bang, that will result in a very nasty environment for bonds.

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 -0.7757 % 1,693.0
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.7757 % 3,092.8
Floater 4.85 % 4.63 % 76,552 16.10 4 -0.7757 % 1,782.4
OpRet 4.84 % -9.88 % 64,708 0.08 1 0.0396 % 2,881.5
SplitShare 5.05 % 4.22 % 104,131 2.25 5 0.0397 % 3,441.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0397 % 2,685.1
Perpetual-Premium 5.46 % -0.95 % 76,907 0.18 12 -0.0420 % 2,697.3
Perpetual-Discount 5.10 % 4.98 % 107,183 14.99 26 -0.0441 % 2,915.1
FixedReset 4.89 % 4.14 % 147,225 7.09 89 0.3583 % 2,074.0
Deemed-Retractible 4.97 % 3.78 % 114,797 0.34 32 -0.0113 % 2,809.7
FloatingReset 2.80 % 3.99 % 31,743 5.07 12 0.1959 % 2,208.0
Performance Highlights
Issue Index Change Notes
BAM.PR.C Floater -1.71 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-08-26
Maturity Price : 10.33
Evaluated at bid price : 10.33
Bid-YTW : 4.63 %
SLF.PR.J FloatingReset -1.54 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 13.40
Bid-YTW : 10.37 %
BAM.PR.K Floater -1.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-08-26
Maturity Price : 10.39
Evaluated at bid price : 10.39
Bid-YTW : 4.61 %
BAM.PR.B Floater -1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-08-26
Maturity Price : 10.50
Evaluated at bid price : 10.50
Bid-YTW : 4.56 %
CU.PR.F Perpetual-Discount -1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-08-26
Maturity Price : 22.26
Evaluated at bid price : 22.62
Bid-YTW : 4.98 %
MFC.PR.K FixedReset 1.08 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.86
Bid-YTW : 7.77 %
RY.PR.R FixedReset 1.09 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-08-24
Maturity Price : 25.00
Evaluated at bid price : 26.83
Bid-YTW : 3.91 %
NA.PR.Q FixedReset 1.13 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.12
Bid-YTW : 3.98 %
PWF.PR.T FixedReset 1.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-08-26
Maturity Price : 21.00
Evaluated at bid price : 21.00
Bid-YTW : 3.75 %
HSE.PR.A FixedReset 1.24 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-08-26
Maturity Price : 12.26
Evaluated at bid price : 12.26
Bid-YTW : 4.88 %
MFC.PR.N FixedReset 1.28 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.04
Bid-YTW : 7.13 %
SLF.PR.I FixedReset 1.30 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.50
Bid-YTW : 7.03 %
TRP.PR.C FixedReset 1.30 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-08-26
Maturity Price : 13.23
Evaluated at bid price : 13.23
Bid-YTW : 4.15 %
BMO.PR.M FixedReset 1.35 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.08
Bid-YTW : 3.44 %
MFC.PR.I FixedReset 1.41 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.89
Bid-YTW : 6.10 %
TRP.PR.A FixedReset 1.67 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-08-26
Maturity Price : 15.25
Evaluated at bid price : 15.25
Bid-YTW : 4.45 %
BAM.PR.S FloatingReset 2.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-08-26
Maturity Price : 14.65
Evaluated at bid price : 14.65
Bid-YTW : 4.86 %
MFC.PR.L FixedReset 2.34 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.79
Bid-YTW : 7.16 %
TRP.PR.B FixedReset 3.66 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-08-26
Maturity Price : 12.19
Evaluated at bid price : 12.19
Bid-YTW : 4.04 %
Volume Highlights
Issue Index Shares
Traded
Notes
BIP.PR.C FixedReset 180,740 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.32
Bid-YTW : 5.18 %
BMO.PR.K Deemed-Retractible 154,283 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-11-25
Maturity Price : 25.00
Evaluated at bid price : 25.26
Bid-YTW : 1.12 %
NA.PR.A FixedReset 99,418 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-08-15
Maturity Price : 25.00
Evaluated at bid price : 26.35
Bid-YTW : 4.46 %
RY.PR.L FixedReset 49,925 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.25
Bid-YTW : 3.55 %
MFC.PR.B Deemed-Retractible 43,400 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.63
Bid-YTW : 5.46 %
BNS.PR.Y FixedReset 38,426 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.84
Bid-YTW : 5.37 %
There were 9 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
GWO.PR.N FixedReset Quote: 14.29 – 14.53
Spot Rate : 0.2400
Average : 0.1735

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 14.29
Bid-YTW : 9.72 %

MFC.PR.F FixedReset Quote: 14.23 – 14.49
Spot Rate : 0.2600
Average : 0.2083

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 14.23
Bid-YTW : 9.73 %

W.PR.J Perpetual-Discount Quote: 25.20 – 25.47
Spot Rate : 0.2700
Average : 0.2183

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-09-25
Maturity Price : 25.00
Evaluated at bid price : 25.20
Bid-YTW : 3.70 %

PVS.PR.E SplitShare Quote: 25.15 – 25.40
Spot Rate : 0.2500
Average : 0.1985

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-10-31
Maturity Price : 25.00
Evaluated at bid price : 25.15
Bid-YTW : 5.39 %

BNS.PR.B FloatingReset Quote: 22.74 – 22.92
Spot Rate : 0.1800
Average : 0.1339

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.74
Bid-YTW : 4.03 %

W.PR.H Perpetual-Discount Quote: 25.22 – 25.42
Spot Rate : 0.2000
Average : 0.1561

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-09-25
Maturity Price : 25.00
Evaluated at bid price : 25.22
Bid-YTW : 2.48 %

9 Responses to “August 26, 2016”

  1. prefobsessed says:

    new TD pref today – one BILLION in size. unbelievable!!

    The Toronto-Dominion Bank (“TD Bank Group” or
    “TD”) today announced that as a result of strong investor demand for its
    previously announced domestic public offering of Non-Cumulative 5-Year Rate
    Reset Preferred Shares (non-viability contingent capital (NVCC)), Series 14
    (the “Series 14 Shares”), the size of the offering has been increased to 40
    million Series 14 Shares. The gross proceeds of the offering will now be
    $1 billion.

  2. like_to_retire says:

    “The Series 14 Shares will yield 4.85% annually, with dividends payable quarterly, as and when declared by the Board of Directors of TD, for the initial period ending October 31, 2021. Thereafter, the dividend rate will reset every five years at a level of 4.12% over the then five-year Government of Canada bond yield.”

    As BoC rates get lower, the minimum reset feature becomes less important. Yeah, it would be nice if this was an M485, but 412 over BoC ain’t bad for a bank.

  3. Louisprefs says:

    … And it was quickly sold out as far as I can tell. This also means that Summer is over and I expect other banks to do likewise in the upcoming days / weeks on perhaps even better terms.

    I am looking forward to reading how James caclulate / value this one compared with its sisters. TD.PF.G (5.50% +465bps) went down 1% from $26.87 to $26.63 as a result of that new offering. This leads me to believe that it was again not correctly priced in the current pref environment. So, I ordered a few.

  4. Louisprefs says:

    … Before investing time in the process (with no guarantee I will do it), I would be interested to know if anyone of you is aware of a comparative historical analysis of prior issues by Canadian banks in relation to the Canada 5 years rate at the time of their issuance. The theory I would like to test is whether bank issues whose initial rate is equal or above +400bps are at such a historically high spread I believe them to be even if you go back to the times straight perps were issued by banks prior to 2008. I know, by doing this, I am not comparing the same things but this should give an idea as to how the resetable / NVCC features are priced compared to what the normality used to be.

  5. prefobsessed says:

    remember that so-called NVCC “preferred” shares are not preferred at all. the days of thinking that you are actually higher up on the capital structure of a bank are long dead. none of the Big Six that can’t afford to pay their common dividend are going to pay a preferred one. NVCCC “prefs” are just a form of issuer-convertible-to-common “sorry, suckers!” no-growth but all risk stock. you’re taking the same basic risk as common with no growth potential, so, yeah, a higher dividend yield is the only fair compensation. personally, NVCC prefs with a yield of sub 4 % are of zero interest to me. no one should want them, actually. hello, suckers! but to address your question more directly, it’ll be a double-whammy when both oil AND 5y yields rise – bank balance sheets will be in less danger so they can offer lower divs on prefs AND the 3m/5y spread will shrink so much lower reset spreads too. until then, spreads are wayyyy wider than normal, even considering NVCC terms.

  6. liuyun88 says:

    Not sure 3m/5y spread can shrink much anymore from 15bps currently

  7. jiHymas says:

    none of the Big Six that can’t afford to pay their common dividend are going to pay a preferred one.

    I don’t agree with this bit. Stopping a common dividend would be bad enough – particularly for a Canadian bank, where they are hardly ever even reduced – but we saw with Quebecor World, Nortel and Yellow Pages that companies will attempt to continue the preferred dividend at all costs. This is because if they stop the preferred dividend, they can forget about access to public capital markets.

    you’re taking the same basic risk as common with no growth potential

    I don’t agree with this bit either. Preferred Stock has first-loss protection; that is, there is a considerable buffer in which losses are borne exclusively by the common shareholders. Remember CIBC’s loss of $1-billion in 2009? It is quite true that dividends were not affected, but new common was sold at a bargain price – this delayed increases in the dividend and meant a permanent loss of some of the growth that common shareholders pay for.

    NVCC prefs with a yield of sub 4 % are of zero interest to me.

    This gets interesting with the FixedReset sector, in which many are yielding less than 4%, but if we see a rise in the GOC-5 yield they will have the advantage of leverage against changes in this rate.

  8. prefobsessed says:

    hi James. with respect, i don’t think that the regulators would permit any of Big Six to pay pref divs if they were so imperiled that they couldn’t pay common divs. actually i think that the Big Six would continue the common divs at all costs, until stopped by the regulator. these NVCC prefs are not viewed as anything special anymore, this is a new world and the idea of “preferred shares” has been gutted for financial companies. this will happen soon enough with the life insurers as well. i also don’t see that in this new world how pref stock has first-loss protection in any really meaningful way. in 2009, pref stock was not issuer-convertible. NVCC prefs are FAR more likely to trade just like common if the banks come under significant credit stress, not to mention extreme stress. brave new world!

  9. Louisprefs says:

    Thanks prefobsessed James for your very interesting discussion.

    In a sense, I agree with both of you. NVCC prefs are not what bank prefs used to be but they still do provide some better divy and capital (mostly as a consequence of the former) protection than commons.

    If you look in the U.S., all the banks which were able to get through the crisis without (or with little, but I am not sure about that) Tarp money cut significantly their common divy while keeping paying up in full their prefs divy.

    This could happen here too. I would expect a Canadian bank to first reduce its common divy before resorting to getting governmental help triggering conversion of the NVCC into commons. This is, however, not clear / certainly scarier than where we stood with the good old non NVCC bank prefs (RIP).

    However,as some of you may recall (as I do because I made significant losses at the time) even with pre-NVCC prefs, there were serious discussions that US government would passes laws or rules forcing banks to stop(paying divy on prefs and pref capital sharing in the losses if they were to get governmental funded bail out money. Look at the performance of “PFF” (an ETF mostly made of US bank prefs) in February 2009, I am the ones which ran to the exit at the time as there were “rumours” at the time that even Citigroup would not bail out conditional upon the prefs also sharing out in the resulting losses as with ordinaries. In other words, the “NVCC” risk was already there (but lesser obivously) prior to the introduction of these new beasts (and so their lower ratings by credit agencies).

    All this to say that I too would not touch a NVCC issue which doesn’t at least pay +say 100bps than the bank’s commons.

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