PrefBlog

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close May 31, 2023, was $7.7956.

Performance was affected by BN.PR.R underperforming at -6.32% [repeating the last two month’s underperformance, but worse]; as did TRP.PR.D (-6.05%). This was partially mitigated by good performance from MIC.PR.A (+1.93%) and SLF.PR.G (-0.76%) [small holdings are not considered for mention here].

There is still a pronounced ‘risk-off’ sentiment in the market, but I feel it is only a matter of time before investors start paying attention to the fundamental risk of these instruments compared to their eye-popping interest-equivalent yields. In addition, the market appears to be giving considerable weight to Current Yield as a measure of valuation, ignoring or strongly deprecating the potential for large dividend increases on the next few years of resets.

FixedResets continue to yield more, in general, than PerpetualDiscounts; on April 28, I reported median YTWs of 8.64% and 6.59%, respectively, for these two indices; compare with mean Current Yields of 6.05% and 6.43%, respectively. RY.PR.J, to take a representative example, is calculated by HIMIPref™ as having a yield-to-worst of 8.55% at monthend (Current Yield of 4.60%); priced at 17.40, resetting 2025-5-24 at a spread of 274bp over GOC-5 (assumed to be constant at 3.61%) and currently paying 0.80 p.a. (3.20% annually). The next pay-date is 2023-8-24; it is trading cum-dividend.

If we plug the above data into the yield calculator for resets (which is discussed here), we arrive at a quarterly annualized yield of 8.38% for RY.PR.J (this is quarterly compounded yield, not semi-annually as in HIMIPref™ there are also implementation differences). To take this down to 17bp below the PerpetualDiscount median index yield of 6.59% (to account for the calculation methodological differences), which is to say 6.42%, requires the assumption that GOC-5 will be 1.93% forever, as opposed the ‘constant rate’ assumption of 3.61%. Well … pays yer money and take yer chances, gents! Assiduous Readers with long memories will liken this to all the calculations of Break-even Rate Shock when the puzzle represented the same problem with a different sign! Note that even if the unfavourable scenario of GOC-5 = 1.93% is realized, this has only reduced the yield of RY.PR.J to that of the median PerpetualDiscount yield, which isn’t the worst outcome one might fear from one’s investments!

It is of interest to note that the Solactive Laddered Canadian Preferred Share Index (used as the basis for the BMO Laddered Preferred Share Index ETF (ZPR)) is now showing a negative total return for the ten years ending May 31, 2023. Now that’s what I call a bear market! It should come as no surprise that retail, egged on by boneheaded advisors, has decided that this proves it will produce negative returns forever!

The five-year Canada yield increased, with the five-year Canada yield (“GOC-5”) rising from 3.12% at April month-end to 3.61% at May month-end.

The Seniority Spread (between long-term corporate bonds and interest-equivalent PerpetualDiscounts) was 345bp as of 2023-5-31 (chart end-date 2023-5-12) :

The situation with FixedResets is interesting, with the spread between GOC-5 and the interest-adjusted FixedReset (Discount) rate widening significantly from its 2021-11-10 low of 344bp to its current level of 779bp (as of 2023-5-31) … (chart end-date 2023-5-12):

…while at the same time the interest-equivalent spread between FixedReset (Discounts) and PerpetualDiscounts has narrowed to -267bp (as of 2023-5-31) from its 2021-7-28 level of +170bp (chart end-date 2023-5-12):

There is no significant correlation between the Issue Reset Spread and 1-month performance for discounted FixedResets for either the Pfd-2 or Pfd-3 Group issues, which is normal because there is a lot of noise in this inefficient market.

However, the normally moderate correlations between Issue Reset Spread and three-month performance have disappeared again in this month’s check:

There were no significant correlations for either the Pfd-2 Group or the Pfd-3 Group for 1-Month performance against term-to-reset, although there seems to be some mitigating effect of a less than one-year term to reset against the overall poor performance:

… and for three-month performance against term-to-reset, there were again no correlations for either the Pfd-2 Group or the Pfd-3 Group:

It should be noted that to some extent such a dependence (of performance on term-to-reset) can be justified as the nearer-term issues will receive the benefit of higher projected dividend rates sooner as a result of higher GOC-5 yields and therefore, perhaps, for longer. Equations for the relationship between correlation slope and change in GOC-5 were derived in the August PrefLetter.

I keep talking about ‘Sustainable Income’ and nowadays it’s far higher than the dividends that are currently being distributed. This is because Sustainable Income is the average yield-to-worst (YTW) of the portfolio when the YTW is calculated to perpetuity (or to redemption, of course, if the yield to redemption is lower), including resets at the current GOC-5 rate. The sharp increase in GOC-5 in the past year has caused the difference between YTW and Current Yield to skyrocket, but one way or another I expect that these two values will become much closer – slowly at first, but quickening in about two years. We have to wait for the reset date of the MAPF portfolio securities before we see a change in actual cash receipts – and, of course, there is no guarantee whatsoever that the rate used for estimation purposes now will be used for the actual calculation in the future (chart prepared as of 2023-05-12).

These calculations were performed assuming constant contemporary GOC-5 and 3-Month Bill rates, as follows:

Turnover declined to under 1% in May. With volatility and nervousness due to worries about financial stability, spreads were wide; in addition, high trading volumes in the early part of the year have left the portfolio in a highly optimized condition.

There was a sharp increase in the proportion of the portfolio due to be reset within one year; this was due to the simple passage of time, not to current-month trading. The fund holds significant positions in TRP.PR.D, NA.PR.S, RY.PR.Z and BMO.PR.S.

Sectoral distribution of the MAPF portfolio on May 31, 2023, were:

The “total” reflects the un-leveraged total portfolio (i.e., cash is included in the portfolio calculations and is deemed to have a duration and yield of 0.00.). MAPF will often have relatively large cash balances, both credit and debit, to facilitate trading. Figures presented in the table have been rounded to the indicated precision.

Credit distribution is:

Liquidity Distribution is:

The distribution of Issue Reset Spreads is:

Distribution of Floating Rate Start Dates is shown in the table below. This is the date of the next adjustment to the dividend rate, if the issue is currently paying a fixed rate for a limited time; which in practice is successive terms of 5 years. Issues that adjust quarterly are considered “Currently Floating”.

MAPF is, of course, Malachite Aggressive Preferred Fund, a “unit trust” managed by Hymas Investment Management Inc. Further information and links to performance, audited financials and subscription information are available the fund’s web page. The fund may be purchased directly from Hymas Investment Management. A “unit trust” is like a regular mutual fund, but are not sold with a prospectus This is cheaper, but means subscription is restricted to “accredited investors” (as defined by the Ontario Securities Commission). Fund past performances are not a guarantee of future performance. You can lose money investing in MAPF or any other fund.

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close April 28, 2023, was $8.1122.

Performance was affected by PWF.PR.P [reversing last month] underperforming at -3.00%; as did BN.PR.R (-2.64%, reprising last month’s disappointment). This was mitigated by good performance from TRP.PR.A (+2.82%, reversing last month’s) and BMO.PR.T (+2.17%) [small holdings are not considered for mention here].

There is still a pronounced ‘risk-off’ sentiment in the market, but I feel it is only a matter of time before investors start paying attention to the fundamental risk of these instruments compared to their eye-popping interest-equivalent yields.

FixedResets continue to yield more, in general, than PerpetualDiscounts; on April 28, I reported median YTWs of 7.62% and 6.22%, respectively, for these two indices. RY.PR.J, to take a representative example, is calculated by HIMIPref™ as having a yield of 7.61% at monthend; priced at 18.10, resetting 2025-5-24 at a spread of 274bp over GOC-5 (assumed to be constant at 3.12%) and currently paying 0.80 p.a. (3.20% annually). The next pay-date is 2023-5-24; it is trading ex-dividend.

If we plug the above data into the yield calculator for resets (which is discussed here), we arrive at a quarterly annualized yield of 7.47% for RY.PR.J (this is quarterly compounded yield, not semi-annually as in HIMIPref™ there are also implementation differences). To take this down to 14bp below the PerpetualDiscount median index yield of 6.22% (to account for the calculation methodological differences), which is to say 6.08%, requires the assumption that GOC-5 will be 1.88% forever, as opposed the ‘constant rate’ assumption of 3.12%. Well … pays yer money and take yer chances, gents! Assiduous Readers with long memories will liken this to all the calculations of Break-even Rate Shock when the puzzle represented the same problem with a different sign!

The five-year Canada yield increased, with the five-year Canada yield (“GOC-5”) rising from 2.93% at March month-end to 3.12% at April month-end.

The Seniority Spread (between long-term corporate bonds and interest-equivalent PerpetualDiscounts) was 315bp as of 2023-4-26 (chart end-date 2023-4-14) :

The situation with FixedResets is interesting, with the spread between GOC-5 and the interest-adjusted FixedReset (Discount) rate widening significantly from its 2021-11-10 low of 344bp to its current level of 687bp (as of 2023-4-26) … (chart end-date 2023-4-14):

…while at the same time the interest-equivalent spread between FixedReset (Discounts) and PerpetualDiscounts has narrowed to -176bp (as of 2023-4-26) from its 2021-7-28 level of +170bp (chart end-date 2023-4-14):

There is no significant correlation between the Issue Reset Spread and 1-month performance for discounted FixedResets for either the Pfd-2 or Pfd-3 Group issues, which is normal because there is a lot of noise in this inefficient market.

However, the normally moderate correlations between Issue Reset Spread and three-month performance have disappeared again in this month’s check:

There were no significant correlations for either the Pfd-2 Group or the Pfd-3 Group for 1-Month performance against term-to-reset:

… and for three-month performance, there were again no correlations for either the Pfd-2 Group or the Pfd-3 Group:

It should be noted that to some extent such a dependence (of performance on term-to-reset) can be justified as the nearer-term issues will receive the benefit of higher projected dividend rates sooner as a result of higher GOC-5 yields and therefore, perhaps, for longer. Equations for the relationship between correlation slope and change in GOC-5 were derived in the August PrefLetter.

I keep talking about ‘Sustainable Income’ and nowadays it’s far higher than the dividends that are currently being distributed. This is because Sustainable Income is the average yield-to-worst (YTW) of the portfolio when the YTW is calculated to perpetuity (or to redemption, of course, if the yield to redemption is lower), including resets at the current GOC-5 rate. The sharp increase in GOC-5 in the past year has caused the difference between YTW and Current Yield to skyrocket, but one way or another I expect that these two values will become much closer – slowly at first, but quickening in about two years. We have to wait for the reset date of the MAPF portfolio securities before we see a change in actual cash receipts – and, of course, there is no guarantee whatsoever that the rate used for estimation purposes now will be used for the actual calculation in the future (chart prepared as of 2023-04-14).

These calculations were performed assuming constant contemporary GOC-5 and 3-Month Bill rates, as follows:

Turnover remained low at 6% in April, with activitiy concentrated in the latter half of the month. With volatility and nervousness due to worries about financial stability, spreads were wide; in addition, high trading volumes in the early part of the year have left the portfolio in a highly optimized condition.

Sectoral distribution of the MAPF portfolio on April 28, 2023, were:

The “total” reflects the un-leveraged total portfolio (i.e., cash is included in the portfolio calculations and is deemed to have a duration and yield of 0.00.). MAPF will often have relatively large cash balances, both credit and debit, to facilitate trading. Figures presented in the table have been rounded to the indicated precision.

Credit distribution is:

Liquidity Distribution is:

The distribution of Issue Reset Spreads is:

Distribution of Floating Rate Start Dates is shown in the table below. This is the date of the next adjustment to the dividend rate, if the issue is currently paying a fixed rate for a limited time; which in practice is successive terms of 5 years. Issues that adjust quarterly are considered “Currently Floating”.

MAPF is, of course, Malachite Aggressive Preferred Fund, a “unit trust” managed by Hymas Investment Management Inc. Further information and links to performance, audited financials and subscription information are available the fund’s web page. The fund may be purchased directly from Hymas Investment Management. A “unit trust” is like a regular mutual fund, but are not sold with a prospectus This is cheaper, but means subscription is restricted to “accredited investors” (as defined by the Ontario Securities Commission). Fund past performances are not a guarantee of future performance. You can lose money investing in MAPF or any other fund.

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close March 31, 2023, was $8.0788.

Performance was helped this month by the fund’s overweight holdings in FixedResets, which underperformed PerpetualDiscounts during the month (the Solactive Laddered Canadian Preferred Share Index returned -5.75% while TXPR, which includes a significant weight in Straight Preferreds, returned -3.74%). More particularly, TRP.PR.A [reversing last month] underperformed at -7.42%; as did BN.PR.R (-7.05%) and NA.PR.S (-6.03%). This was mitigated by good performance from MIC.PR.A (+4.76%) [reversing last month], PWF.PR.P (-1.45%) and BMO.PR.S (+2.35%) [small holdings are not considered for mention here].

There is still a pronounced ‘risk-off’ sentiment in the market, but I feel it is only a matter of time before investors start paying attention to the fundamental risk of these instruments compared to their eye-popping interest-equivalent yields.

FixedResets continue to yield more, in general, than PerpetualDiscounts; on March 31, I reported median YTWs of 7.41% and 6.22%, respectively, for these two indices. RY.PR.J is calculated by HIMIPref™ as having a yield of 7.41% at monthend; priced at 18.17, resetting 2025-5-24 at a spread of 274bp over GOC-5 (assumed to be constant at 2.93%) and currently paying 0.80 p.a. (3.20% annually). The next pay-date is 2023-5-24.

If we plug the above data into the yield calculator for resets (which is discussed here), we arrive at a quarterly annualized yield of 7.28% for RY.PR.J (this is quarterly compounded yield, not semi-annually as in HIMIPref™ there are also implementation differences). To take this down to 13bp below the PerpetualDiscount median index yield of 6.22% (to account for the calculation methodological differences), which is to say 6.09%, requires the assumption that GOC-5 will be 2.05% forever, as opposed the ‘constant rate’ assumption of 2.93%. Well … pays yer money and take yer chances, gents! Assiduous Readers with long memories will liken this to all the calculations of Break-even Rate Shock when the puzzle represented the same problem with a different sign!

The five-year Canada yield rocketted upwards, with the five-year Canada yield (“GOC-5”) crashing from 3.61% at February month-end to 2.93% at March month-end.

The Seniority Spread (between long-term corporate bonds and interest-equivalent PerpetualDiscounts) was 305bp as of 2023-3-29 (chart end-date 2023-3-10) :

The situation with FixedResets is interesting, with the spread between GOC-5 and the interest-adjusted FixedReset (Discount) rate widening significantly from its 2021-11-10 low of 344bp to its current level of 698bp (as of 2023-3-29) … (chart end-date 2023-3-10):

…while at the same time the interest-equivalent spread between FixedReset (Discounts) and PerpetualDiscounts has narrowed to -162bp (as of 2023-3-29) from its 2021-7-28 level of +170bp (chart end-date 2023-3-10):

There is no significant correlation between the Issue Reset Spread and 1-month performance for discounted FixedResets for either the Pfd-2 or Pfd-3 Group issues, which is normal because there is a lot of noise in this inefficient market.

However, the normally moderate correlations between Issue Reset Spread and three-month performance have disappeared again in this month’s check:

There were no significant correlations for either the Pfd-2 Group or the Pfd-3 Group for 1-Month performance against term-to-reset, despite the massive change in the GOC-5 yield from 3.61% to 2.93%) during the period. A slightly smaller change in the other direction led to significant corellations last month:

… and for three-month performance, there were again no correlations for either the Pfd-2 Group or the Pfd-3 Group; here, the change in GOC-5 was from 3.37% to 2.93%:

It should be noted that to some extent such a dependence (of performance on term-to-reset) can be justified as the nearer-term issues will receive the benefit of higher projected dividend rates sooner as a result of higher GOC-5 yields and therefore, perhaps, for longer. Equations for the relationship between correlation slope and change in GOC-5 were derived in the August PrefLetter.

I keep talking about ‘Sustainable Income’ and nowadays it’s far higher than the dividends that are currently being distributed. This is because Sustainable Income is the average yield-to-worst (YTW) of the portfolio when the YTW is calculated to perpetuity (or to redemption, of course, if the yield to redemption is lower), including resets at the current GOC-5 rate. The sharp increase in GOC-5 in the past year has caused the difference between YTW and Current Yield to skyrocket, but one way or another I expect that these two values will become much closer – slowly at first, but quickening in about two years. We have to wait for the reset date of the MAPF portfolio securities before we see a change in actual cash receipts – and, of course, there is no guarantee whatsoever that the rate used for estimation purposes now will be used for the actual calculation in the future (chart prepared as of 2023-03-10).

These calculations were performed assuming constant contemporary GOC-5 and 3-Month Bill rates, as follows:

Turnover plummetted to 5% in March, and was zero in the latter half of the month. With volatility and nervousness due to worries about financial stability, spreads were wide; in addition, high trading volumes in the past two months have left the portfolio in a highly optimized condition.

Sectoral distribution of the MAPF portfolio on March 31, 2023, were:

The “total” reflects the un-leveraged total portfolio (i.e., cash is included in the portfolio calculations and is deemed to have a duration and yield of 0.00.). MAPF will often have relatively large cash balances, both credit and debit, to facilitate trading. Figures presented in the table have been rounded to the indicated precision.

Credit distribution is:

Liquidity Distribution is:

The distribution of Issue Reset Spreads is:

Distribution of Floating Rate Start Dates is shown in the table below. This is the date of the next adjustment to the dividend rate, if the issue is currently paying a fixed rate for a limited time; which in practice is successive terms of 5 years. Issues that adjust quarterly are considered “Currently Floating”.

MAPF is, of course, Malachite Aggressive Preferred Fund, a “unit trust” managed by Hymas Investment Management Inc. Further information and links to performance, audited financials and subscription information are available the fund’s web page. The fund may be purchased directly from Hymas Investment Management. A “unit trust” is like a regular mutual fund, but are not sold with a prospectus This is cheaper, but means subscription is restricted to “accredited investors” (as defined by the Ontario Securities Commission). Fund past performances are not a guarantee of future performance. You can lose money investing in MAPF or any other fund.

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close February 28, 2023, was $8.5353.

Performance was helped this month by the fund’s overweight holdings in FixedResets, which underperformed PerpetualDiscounts during the month (the Solactive Laddered Canadian Preferred Share Index returned -0.55% while TXPR, which includes a significant weight in Straight Preferreds, returned -0.96%). More particularly, MIC.PR.A [reversing recent trends] underperformed at -3.19%; as did TD.PF.C (-0.78%) and TD.PF.B (-0.22%). This was offset by good performance from TRP.PR.A (+4.00%), MFC.PR.F [reversing recent trends] (+2.04%) and TRP.PR.D (+0.92%) [small holdings are not considered for mention here].

There is still a pronounced ‘risk-off’ sentiment in the market, but I feel it is only a matter of time before investors start paying attention to the fundamental risk of these instruments compared to their eye-popping interest-equivalent yields.

FixedResets continue to yield more, in general, than PerpetualDiscounts; on February 28, I reported median YTWs of 7.74% and 6.32%, respectively, for these two indices. RY.PR.J is calculated by HIMIPref™ as having a yield of 7.74% at monthend; priced at 19.13, resetting 2025-5-24 at a spread of 274bp over GOC-5 (assumed to be constant at 3.61%) and currently paying 0.80 p.a. (3.20% annually). The next pay-date is 2023-5-24.

If we plug the above data into the yield calculator for resets (which is discussed here), we arrive at a quarterly annualized yield of 7.59% for RY.PR.J (this is quarterly compounded yield, not semi-annually as in HIMIPref™ there are also implementation differences). To take this down to 15bp below the PerpetualDiscount median index yield of 6.32% (slightly below to account for the calculation differences), which is to say 6.17%, requires the assumption that GOC-5 will be 2.25% forever, as opposed the ‘constant rate’ assumption of 3.61%. Well … pays yer money and take yer chances, gents! Assiduous Readers with long membories will liken this to all the calculations of Break-even Rate Shock when the puzzle represented the same problem with a different sign!

The five-year Canada yield rocketted upwards, with the five-year Canada yield (“GOC-5”) increasing from 3.07% at January month-end to 3.61% at February month-end.

The Seniority Spread (between long-term corporate bonds and interest-equivalent PerpetualDiscounts) has remained steady at around to 290bp and was 295bp as of 2023-2-1 (chart end-date 2023-2-10) :

The situation with FixedResets is interesting, with the spread between GOC-5 and the interest-adjusted FixedReset (Discount) rate widening significantly from its 2021-11-10 low of 344bp to its current level of 645bp (as of 2023-3-1) … (chart end-date 2023-2-10):

…while at the same time the interest-equivalent spread between FixedReset (Discounts) and PerpetualDiscounts has narrowed to -185bp (as of 2023-3-1) from its 2021-7-28 level of +170bp (chart end-date 2023-2-10):

There is no significant correlation between the Issue Reset Spread and 1-month performance for discounted FixedResets for either the Pfd-2 or Pfd-3 Group issues, which is normal because there is a lot of noise in this inefficient market.

However, the normally moderate correlations between Issue Reset Spread and three-month performance have disappeared again in this month’s check:

There were significant correlations for both the Pfd-2 Group (26%) and the Pfd-3 Group (16%) for 1-Month performance against term-to-reset, due to the change in the GOC-5 yield from 3.07% to 3.61%) during the period:

… and for three-month performance, there was good correlation for the Pfd-2 Group (29%) but negligible for the Pfd-3 Group; here, the change in GOC-5 was from 3.21% to 3.61%:

It should be noted that to some extent such a dependence (of performance on term-to-reset) can be justified as the nearer-term issues will receive the benefit of higher projected dividend rates sooner as a result of higher GOC-5 yields and therefore, perhaps, for longer. Equations for the relationship between correlation slope and change in GOC-5 were derived in the August PrefLetter.

I keep talking about ‘Sustainable Income’ and nowadays it’s far higher than the dividends that are currently being distributed. This is because Sustainable Income is the average yield-to-worst (YTW) of the portfolio when the YTW is calculated to perpetuity (or to redemption, of course, if the yield to redemption is lower), including resets at the current GOC-5 rate. The sharp increase in GOC-5 in the past year has caused the difference between YTW and Current Yield to skyrocket, but one way or another I expect that these two values will become much closer – slowly at first, but quickening in about two years. We have to wait for the reset date of the MAPF portfolio securities before we see a change in actual cash receipts – and, of course, there is no guarantee whatsoever that the rate used for estimation purposes now will be used for the actual calculation in the future (chart prepared as of 2023-02-10).

These calculations were performed assuming constant contemporary GOC-5 and 3-Month Bill rates, as follows:

Turnover was high at 21% in February, due to distortions in relative pricing. Market volumes have been low for quite some time, having never really recovered from the usual summer decline in 2021. Bank issues looked relatively cheap throughout the month.

Sectoral distribution of the MAPF portfolio on February 28, 2023, were:

The “total” reflects the un-leveraged total portfolio (i.e., cash is included in the portfolio calculations and is deemed to have a duration and yield of 0.00.). MAPF will often have relatively large cash balances, both credit and debit, to facilitate trading. Figures presented in the table have been rounded to the indicated precision.

Credit distribution is:

Liquidity Distribution is:

The distribution of Issue Reset Spreads is:

Distribution of Floating Rate Start Dates is shown in the table below. This is the date of the next adjustment to the dividend rate, if the issue is currently paying a fixed rate for a limited time; which in practice is successive terms of 5 years. Issues that adjust quarterly are considered “Currently Floating”.

MAPF is, of course, Malachite Aggressive Preferred Fund, a “unit trust” managed by Hymas Investment Management Inc. Further information and links to performance, audited financials and subscription information are available the fund’s web page. The fund may be purchased directly from Hymas Investment Management. A “unit trust” is like a regular mutual fund, but are not sold with a prospectus This is cheaper, but means subscription is restricted to “accredited investors” (as defined by the Ontario Securities Commission). Fund past performances are not a guarantee of future performance. You can lose money investing in MAPF or any other fund.

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close January 31, 2023, was $8.5200.

Performance was hurt by the fund’s overweight holdings in FixedResets, which underperformed PerpetualDiscounts during the month (the Solactive Laddered Canadian Preferred Share Index returned +6.42% while TXPR, which includes a significant weight in Straight Preferreds, returned +7.27%). More particularly, MFC.PR.F [again!] (+2.83%), TRP.PR.A [again!] (+4.34%) and GWO.PR.N (+4.73%) underperformed while this was mitigated by good performance by MIC.PR.A [again!] (+11.78%), FTS.PR.K (+9.32%) and FTS.PR.M [rebounding!] (+8.55%) [small holdings are not considered for mention here].

There is still a pronounced ‘risk-off’ sentiment in the market, but I feel it is only a matter of time before investors start paying attention to the fundamental risk of these instruments compared to their eye-popping interest-equivalent yields.

The five-year Canada yield continued its drop that started in late October, with the five-year Canada yield (“GOC-5”) declining from 3.37% at December month-end to 3.07% at January month-end.

The Seniority Spread (between long-term corporate bonds and interest-equivalent PerpetualDiscounts) has recently declined to 290bp (as of 2023-2-1) and is very volatile (chart end-date 2023-1-13) :

The situation with FixedResets is interesting, with the spread between GOC-5 and the interest-adjusted FixedReset (Discount) rate widening significantly from its 2021-11-10 low of 344bp to its current level of 638bp (as of 2023-2-1) … (chart end-date 2023-1-13):

…while at the same time the interest-equivalent spread between FixedReset (Discounts) and PerpetualDiscounts has narrowed to -153bp (as of 2023-1-31) from its 2021-7-28 level of +170bp (chart end-date 2023-1-13):

There is no significant correlation between the Issue Reset Spread and 1-month performance for discounted FixedResets for either the Pfd-2 or Pfd-3 Group issues, which is normal because there is a lot of noise in this inefficient market.

However, the normally moderate correlations between Issue Reset Spread and three-month performance have disappeared again in this month’s check:

There was no significant correlation for either groups for 1-Month performance against term-to-reset, despite the change in the GOC-5 yield from 3.37% to 3.07%) during the period:

… and for three-month performance, there was again no correlation for either group; here, the change in GOC-5 was from 3.45% to 3.07%:

It should be noted that to some extent such a dependence (of performance on term-to-reset) can be justified as the nearer-term issues will receive the benefit of higher projected dividend rates sooner as a result of higher GOC-5 yields and therefore, perhaps, for longer. Equations for the relationship between correlation slope and change in GOC-5 were derived in the August PrefLetter.

I keep talking about ‘Sustainable Income’ and nowadays it’s far higher than the dividends that are currently being distributed. This is because Sustainable Income is the average yield-to-worst (YTW) of the portfolio when the YTW is calculated to perpetuity (or to redemption, of course, if the yield to redemption is lower), including resets at the current GOC-5 rate. The sharp increase in GOC-5 in the past year has caused the difference between YTW and Current Yield to skyrocket, but one way or another I expect that these two values will become much closer – slowly at first, but quickening in about two years. We have to wait for the reset date of the MAPF portfolio securities before we see a change in actual cash receipts – and, of course, there is no guarantee whatsoever that the rate used for estimation purposes now will be used for the actual calculation in the future (chart prepared as of 2023-01-13).

These calculations were performed assuming constant contemporary GOC-5 and 3-Month Bill rates, as follows:

Turnover was high at 14% in January, due to distortions in relative pricing. Market volumes have been very low for quite some time, having never really recovered from the usual summer decline in 2021.

Sectoral distribution of the MAPF portfolio on January 31, 2023, were:

The “total” reflects the un-leveraged total portfolio (i.e., cash is included in the portfolio calculations and is deemed to have a duration and yield of 0.00.). MAPF will often have relatively large cash balances, both credit and debit, to facilitate trading. Figures presented in the table have been rounded to the indicated precision.

Credit distribution is:

Liquidity Distribution is:

The distribution of Issue Reset Spreads is:

Distribution of Floating Rate Start Dates is shown in the table below. This is the date of the next adjustment to the dividend rate, if the issue is currently paying a fixed rate for a limited time; which in practice is successive terms of 5 years. Issues that adjust quarterly are considered “Currently Floating”.

MAPF is, of course, Malachite Aggressive Preferred Fund, a “unit trust” managed by Hymas Investment Management Inc. Further information and links to performance, audited financials and subscription information are available the fund’s web page. The fund may be purchased directly from Hymas Investment Management. A “unit trust” is like a regular mutual fund, but are not sold with a prospectus This is cheaper, but means subscription is restricted to “accredited investors” (as defined by the Ontario Securities Commission). Fund past performances are not a guarantee of future performance. You can lose money investing in MAPF or any other fund.