PrefBlog

As a result of the migration from PerpetualPremium to PerpetualDiscount due to price declines, the PerpetualPremium index has only two remaining members: GWL.PR.O, a chimerical issue which can sometimes be a straight, sometimes a FixedFloater, depending on where Prime is, and NA.PR.M.

There were the following intra-month changes:

A new low in yield was set by the FixedReset sub-index today.

Some charts will illustrate:

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In the past year, FixedReset yields have declined from 5.72% to 3.46%, while PerpetualDiscounts have declined from 7.29% to 6.01%. Thus, the spread has widened from 157bp to 255bp – although it is dangerous and misleading to talk of the spread between these two classes, since FixedResets may now, by and large, be confidently expected to be called at the first opportunity. Thus, the basis risk that existing at the beginning of the period (more inclined to inflation protection) is not the same as the basis risk that exists now (more inclined to term spread).

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Duration and positive carry have enabled PerpetualDiscounts to outperform in the face of widening. At the current spread of 255bp and Modified Duration of 16.7, and assuming a constant future yield on FixedResets, the breakeven change in spread is a widening of about 15bp p.a.

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The past year’s outperformance by FixedResets in yield terms is consistent with the increase in the Breakeven Inflation Rate on Long Nominals vs. Long RRBs.

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… and longer term data is consistent with the idea that this is finished.

No chart for this one, but LongCorporate investors do not share any inflation fears that PerpetualDiscount investors might have; the spread between interest-equivalent PerpetualDiscounts and Long Corporates (the Seniority Spread) has increased dramatically of late.

Update, 2010-3-20: OK, here are some more charts:

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Performance of the HIMIPref™ Indices for February, 2010, was:

The pre-tax interest equivalent spread of PerpetualDiscounts over Long Corporates (which I also refer to as the Seniority Spread) ended the month at +235bp, unchanged from January month-end. The decline in the PerpetualDiscount index was due to an increase in yields on long corporates from 5.8% to 5.9%, with the Seniority Spread remaining constant.

The relative returns on Floaters over the past year continues to impress:

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But one must remember how they got there:

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FixedReset volume seems to have found a level. Volume may be under-reported due to the influence of Alternative Trading Systems (as discussed in the November PrefLetter), but I am biding my time before incorporating ATS volumes into the calculations, to see if the effect is transient or not. The average volume of FixedResets continues to decline, which may be due to a number of factors:

• The calculation is an exponential moving average with dampening applied to spikes. While this procedure has worked very well in the past (it is used to estimate the maximum size of potential trades when performing simulations) there are no guarantees that it works well this particular time
• Other than a burst of issuance in January, there hasn’t been much issuance of investment-grade FixedResets recently, which will decrease the liquidity of the whole group, both for technical and real reasons
• The issues are becoming seasoned, as the shares gradually find their way into the accounts of buy-and-hold investors

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As discussed in January, the impressive returns of the past year cannot continue indefinately. The long term return on a fixed income instrument is its yield – 5.9% for a PerpetualDiscount, and about 3.6% to the call date for a FixedReset.

Compositions of the passive funds were discussed in the September edition of PrefLetter.

Claymore has published NAV and distribution data (problems with the page in IE8 can be kludged by using compatibility view) for its exchange traded fund (CPD) and I have derived the following table:

Claymore currently holds $420,750,223 $397,666,518 (advisor & common combined) in CPD assets, up about $23-million from the $397,666,518 reported last month and up about $47-million from the $373,729,364 reported at year-end.

The DPS.UN NAV for February 24 has been published so we may calculate the approximate February returns.

Now, to see the DPS.UN quarterly NAV approximate return, we refer to the calculations for December and January:

There were the following intra-month changes:

Performance of the HIMIPref™ Indices for January, 2010, was:

The pre-tax interest equivalent spread of PerpetualDiscounts over Long Corporates (which I also refer to as the Seniority Spread) closed the year at 220bp, a slight tightening from the 225bp at November month-end.

The relative returns on Floaters over the past year continues to impress:

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But one must remember how they got there:

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FixedReset volume ticked up mid-month with the burst of issuance, but has resumed its downward trend. Volume may be under-reported due to the influence of Alternative Trading Systems (as discussed in the November PrefLetter), but I am biding my time before incorporating ATS volumes into the calculations, to see if the effect is transient or not. The average volume of FixedResets continues to decline, which may be due to a number of factors:

• The calculation is an exponential moving average with dampening applied to spikes. While this procedure has worked very well in the past (it is used to estimate the maximum size of potential trades when performing simulations) there are no guarantees that it works well this particular time
• Other than the January burst, there hasn’t been much issuance of investment-grade FixedResets recently, which will decrease the liquidity of the whole group, both for technical and real reasons
• The issues are becoming seasoned, as the shares gradually find their way into the accounts of buy-and-hold investors

Click for big

And the yield-to-worst on FixedResets seems to have found a bottom:

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As discussed last month, the impressive returns of the past year cannot continue indefinately. The long term return on a fixed income instrument is its yield – 5.8% for a PerpetualDiscount, and about 3.6% to the call date for a FixedReset.

Compositions of the passive funds were discussed in the September edition of PrefLetter.

Claymore has published NAV and distribution data (problems with the page in IE8 can be kludged by using compatibility view) for its exchange traded fund (CPD) and I have derived the following table:

It is of interest to note that the January total return for CPD’s benchmark, TXPR, was -0.29% and the trailing three-month return was +4.03%; tracking error is therefore -0.24% and -0.37%, of which about 0.04% and 0.11%, respectively, is MER. Their efforts at rebalancing cost unitholders a lot of money! The MER may be only 45bp, but the first 2010 semiannual rebalancing alone cost about 20bp.

Claymore currently holds $397,666,518 (advisor & common combined) in CPD assets, up about $26-million from the $373,729,364 reported last month.

The DPS.UN NAV for December 30 has been published so we may calculate the approximate December returns.

Now, to see the DPS.UN quarterly NAV approximate return, we refer to the calculations for November and December:

There were the following intra-month changes:

Performance of the HIMIPref™ Indices for December, 2009, was:

The charts have a calmer look to them this month, now that the apocalyptic months of October and November 2008 have been removed from the trailing 12-months, together with the enormous rally of December 2008.

The pre-tax interest equivalent spread of PerpetualDiscounts over Long Corporates (which I also refer to as the Seniority Spread) closed the year at 220bp, a slight tightening from the 225bp at November month-end.

Meanwhile, Floaters continued their wild ride.

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Volume may be under-reported due to the influence of Alternative Trading Systems (as discussed in the November PrefLetter), but I am biding my time before incorporating ATS volumes into the calculations, to see if the effect is transient or not. The average volume of FixedResets continues to decline, which may be due to a number of factors:

• The calculation is an exponential moving average with dampening applied to spikes. While this procedure has worked very well in the past (it is used to estimate the maximum size of potential trades when performing simulations) there are no guarantees that it works well this particular time
• There hasn’t been much issuance of investment-grade FixedResets recently, which will decrease the liquidity of the whole group, both for technical and real reasons
• The issues are becoming seasoned, as the shares gradually find their way into the accounts of buy-and-hold investors

As usual, I will make no predictions of how long the calculated current trend will continue or what liquidity might be like next year!

Perhaps more interesting is the question of total returns on FixedResets. It will not have escaped notice that they outperformed PerpetualDiscounts for the month and quarter, but how long can that last? The median weighted average yield to worst for the asset class is a mere 3.59% … and that works out to an expected total return of about 30bp per month.

Thirty beeps per month depends on their being called at the proper time – the median weighted average duration to worst is 3.85 years, or call it four years’ term. Calls look like a virtual certainty at this time; if these issues aren’t called en masse it will almost certainly be because we’ve had another financial disaster and holders will wish they had been called. There will be many, of course, who think they might be reset rather than called while trading at a huge premium, but these guys also wear tin-foil hats and sell new issues to their clients, so those opinions can be discounted.

Thirty beeps per month for four years! There’s nothing intrinsically wrong with that yield, given that Claymore’s short-term corporate bond product, CBO, has a yield of 2.52% gross of MER 0.25% (and note that this product has positions in bank sub-debt and Innovative Tier 1 Capital in addition to, you know, short term corporate bonds), so the pre-tax interest equivalent spread after fees for FixedResets over CBO of 276bp. One can quite easily make a case that FixedResets are still cheap by those standards.

But what I’m saying is that fixed income mathematics are cruel and inexorable. Every beep of monthly return in excess of the 30bp average will be paid for by underperformance relative to that yardstick sometime before the (presumed) call – so the current levels of monthly and quarterly returns will not last forever. It is interesting to speculate just how returns will normalize … will it be a gradual process, with some months making 40bp and others making 20bp? Or will the correction occur in one big fat lump when the first one gets called? Stay tuned!

Compositions of the passive funds were discussed in the September edition of PrefLetter.

Alas and alack! Claymore cannot be bothered to publish NAVs on New Year’s Eve, so I’ll have to update this post with passive fund returns when the information is available.

Update, 2010-01-11: Claymore has published NAV and distribution data (problems with the page in IE8 can be kludged by using compatibility view) for its exchange traded fund (CPD) and I have derived the following table:

Claymore currently holds $373,729,364 (advisor & common combined) in CPD assets, up $23-million on the month and a stunning increase from the $84,005,161 reported in the Dec 31/08 Annual Report

The DPS.UN NAV for December 30 has been published so we may calculate the approximate December returns.

Now, to see the DPS.UN quarterly NAV approximate return, we refer to the calculations for November and October:

There were the following intra-month changes:

Performance of the HIMIPref™ Indices for November, 2009, was:

The charts have a calmer look to them this month, now that the apocalyptic months of October and November 2008 have been removed from the trailing 12-months.

The pre-tax interest equivalent spread of PerpetualDiscounts over Long Corporates (which I also refer to as the Seniority Spread) closed the month at 225bp, a significant tightening from the 250bp reported on October 30.

Meanwhile, Floaters continued their wild ride.

Click for big

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Volume may be under-reported due to the influence of Alternative Trading Systems (as discussed in the November PrefLetter), but I am biding my time before incorporating ATS volumes into the calculations, to see if the effect is transient or not. The average volume of FixedResets continues to decline, which may be due to a number of factors:

• The calculation is an exponential moving average with dampening applied to spikes. While this procedure has worked very well in the past (it is used to estimate the maximum size of potential trades when performing simulations) there are no guarantees that it works well this particular time
• There hasn’t been much issuance of investment-grade FixedResets recently, which will decrease the liquidity of the whole group, both for technical and real reasons
• The issues are becoming seasoned, as the shares gradually find their way into the accounts of buy-and-hold investors

As usual, I will make no predictions of how long the calculated current trend will continue or what liquidity might be like next year!

Compositions of the passive funds were discussed in the September edition of PrefLetter.

Claymore has published NAV and distribution data (problems with the page in IE8 can be kludged by using compatibility view) for its exchange traded fund (CPD) and I have derived the following table:

Claymore currently holds $350,336,161 (advisor & common combined) in CPD assets, up $35-million on the month and a stunning increase from the $84,005,161 reported in the Dec 31/08 Annual Report

The DPS.UN NAV for December 2 has been published so we may calculate the approximate November returns.

Now, to see the DPS.UN quarterly NAV approximate return, we refer to the calculations for September and October:

There were the following intra-month changes: