PrefBlog

Many thanks to the Globe & Mail for printing my opinion piece, In this politicized climate, the Bank of Canada needs to be a lot better at communicating.

Assiduous Readers may well find part of the article oddly familiar … :

Transparency is also inadequate when announcing policy rate decisions. A recent staff discussion paper compared the bank’s disclosures with those of eight other major central banks. Of particular interest are the voting records (reporting on how committee members voted on the policy), and the diversity of views (reporting on which issues were considered important by a minority of members). The Bank of Canada was among five central banks that did not disclose voting records at all, and one of only three that provided no information regarding diversity of views.

This secrecy must end, together with the policy that decisions be reached via absolute consensus. Predictions are inherently uncertain and reporting of policy rate decisions needs to reflect this. Competent, confident members of the bank’s governing council will be pleased to occasionally accept minority status when they feel that an important point must be made; indeed, a recent article from the International Monetary Fund advocates that policy rate decisions should take a form similar to judicial decisions, with full space given to dissenting views.

This information will be of great value to investors as they form their own views and the resultant market information will in turn inform the bank’s decision-makers. Investors currently place undue confidence in central-bank pronouncements, leading to an echo-chamber effect in which the only feedback the bank receives from the market is a reflection of their most recent prediction.

Update, 2023-2-16: I received an answer to my inquiry to the Department of Finance:

Thank you for your correspondence of February 3, 2023 regarding Canada’s real return bonds (RRBs). The Government of Canada appreciates your interest in this topic and is always open to receiving views.

The Government reviews and assesses programs on a regular basis to ensure they continue to function as expected. As part of a 2019 review of the RRB program, the Government undertook extensive consultations, which showed poor demand for RRBs. This view was reinforced during the Fall 2022 Debt Management Strategy Consultations.

The consultation document for the RRB review, along with its summary, are available on the Bank of Canada’s website at bankofcanada.ca/2019/08/government-canada-real-return-bond-consultations/ and bankofcanada.ca/wp-content/uploads/2020/03/governement-canada-rrb-consultations-summary.pdf. A summary of the Fall 2022 consultations is also available on the Bank of Canada’s website at bankofcanada.ca/2022/11/fall-2022-debt-management-strategy-consultations/.

Market consultations are an integral part of forming the Government’s Debt Management Strategy. The Government seeks to maintain an open dialogue with stakeholders and highly values all the input received.

The 2022 Fall Economic Statement announced the decision to cease issuance of RRBs effective immediately. At this time, the Government is not considering a reintroduction of RRBs. All outstanding RRBs will continue to be honoured.

Thank you for contacting the Department of Finance Canada.

Sp, judging from this eMail, there were no estimates made regarding the excess cost, if any, of the RRB programme.

And on 2023-2-14, the Bank of Canada answered my question of 2023-02-04:

Does that Bank of Canada have any information available on the liquidity of Real Return Bonds in the period 2019-2022 (inclusive) and how this liquidity may be determined to affect the prices of these securities in the primary and/or secondary markets?

If so, how may I access this information?

Thank you for your follow-up inquiry and we apologize for the delayed response.

We regret we do not have the information you are looking for.

Update, 2023-2-17: My drafts for this piece included footnotes. I won’t publish the drafts, but here are the footnoted links:
Trump
Erdogan
Poilievre
Importance of public confidence
Confidence and Monetary Policy Transmission
Trust and Transparency
BoC on ‘Printing Money’
Poilievre on ‘Printing Money’
BoC on ‘Understanding Quantitative Easing’ See also Settlement Balances Deconstructed
BoE ‘Quantitative Easing’ and BoE ‘Understanding the Central Bank Balance Sheet’
Canadian Fixed-Income Forum
CFIF Minutes, 2022-11-29
GoC, Debt Management Strategy 2022-3
BoC, Real Return Bond Funding Review, 2003
Government of Canada Real Return Bond Consultations Summary (2019)
GoC RRB programme cancellation
BoC Transparency Comparison
Diverse views important
Can central banks talk too much?

Many thanks to John Heinzl of the Globe for quoting me in his piece If a yield seems to good to be true, published 2021-7-30:

Rather than continue to pay a 10.25-per-cent coupon on $300-million of bonds that are no longer serving their initial purpose, CIBC would rather redeem them. Notwithstanding the original 2039 call date, CIBC reserved the right to redeem the notes at face value earlier if there was a “regulatory event” that affected the notes’ eligibility as Tier 1 capital.

And that’s exactly what CIBC intends to do. In February, 2020, the bank announced that, subject to regulatory approval, it “currently expects to exercise a regulatory event redemption right in its fiscal 2022 year … meaning that this redemption right could occur as early as November 1, 2021.”

CIBC isn’t alone. Toronto-Dominion Bank has said it also expects to exercise a regulatory event redemption right on its TD Capital Trust IV Notes – Series 2 as early as Nov. 1.

“They’re all going to go. They’re all dead,” James Hymas, president of Hymas Investment Management, said of the capital trust notes. The market has understood this for years, which is why the price of the bonds has gradually fallen.

Many thanks to Rob Carrick for quoting me in his latest piece, Preferred shares have been all-stars in the past year. Now, what?:

Prefs still offer something for the income-hungry investor, said James Hymas, president of Hymas Investment Management Inc. The dividend yield on the S&P/TSX preferred share index is about 4.5 per cent, compared to a yield of 0.8 per cent from the five-year Government of Canada bond.

Mr. Hymas urges investors to collect their dividends and learn to live with price fluctuations like we’ve seen in the past two years.

“One thing with preferred shares is that you have very little institutional presence, and it’s institutions that generally keep the markets on track,” he said. “Extreme price volatility is simply part of the retail market.”

Thanks to Larry MacDonald for quoting me in his latest piece, Short sales on the TSX: What bearish investors are betting against:

The relative stability of ZPR’s short position in volatile stock markets suggests that it was put in place mainly for hedging purposes. Jeffrey S. Herold, CEO of investment firm J. Zechner Associates Inc. confirms this when he says, “Dealers hedging individual preferred holdings, derivatives and structured notes account for the majority of the shorts”

James Hymas, President of Hymas Investment Management Inc., reinforces this view, declaring that the “shorts are probably market makers.” He says retail investors like to buy ZPR more than individual preferred shares, so there are forces pushing ZPR to a premium over its basket of preferred shares. With market makers often selling short to fulfill investors’ buy orders, ZPR’s market makers may not want to cover their shorts with purchases of ZPR (as units become available) but seek a better spread through hedging with a basket of individual preferred shares.

Many thanks to John Heinzl for quoting me in his piece A case study in how not to invest in bank stocks:

BK and BK.PR.A are two different classes of shares issued by Canadian Banc Corp., an investment vehicle known as a “split share” corporation. Canadian Banc Corp. holds a portfolio of the six biggest Canadian bank stocks, and while BK and BK.PR.A both provide exposure to those underlying stocks, they do so in different ways and with dramatically different results.
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You may be wondering how BK can pay a 10-per-cent dividend when the preferred shares are already yielding 5 per cent. According to the prospectus, “to supplement the dividends received on the portfolio and to reduce risk, the company will from time to time write covered call options in respect of some or all of the common shares in the portfolio.”

But many split share corporations also resort to selling stocks in the underlying portfolio to generate cash required to pay dividends on their class A shares, said James Hymas, president of Hymas Investment Management. “It is my belief that, if people understood class A split shares, they wouldn’t buy them.”
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What’s more, your adviser should have known that, although BK and BK.PR.A have different characteristics on their own, they are complementary pieces of the same underlying portfolio. When you put them together you’re essentially buying a portfolio of bank stocks – just in two different wrappers that add unnecessary layers of complexity and fees. Canadian Banc Corp.’s management expense ratio of 1.35 per cent is more than double ZEB’s MER of 0.62 per cent.

“Your reader was given really stupid advice by the adviser, because when you own the class A shares and preferred shares in equal proportions, all you own is a fund with a lot of bells and whistles that owns bank stocks,” Mr. Hymas said. “You can do that a whole lot easier by buying an ETF that owns bank stocks. And it’s much cheaper.”

Neither Mr. Heizl nor I can be faulted for any lack of consistency, since nine years ago he quoted me as saying:

For those reasons, Mr. Hymas says the capital shares are only appropriate for “suckers.”

That sparked a certain amount of debate. I look forward to receiving a lot of angry mail from everyone who’s ever made a nickel on their Capital Unit investments!

Many thanks to Rob Carrick for the shout-out in his recent piece Five reasons why it’s so hard to invest in preferred shares:

RESEARCH
Considering the high level of interest in preferred shares, there’s a surprising lack of analyst reports and other commentary. Two websites to try are PrefInfo.com and PrefBlog. The investor relations pages on corporate websites are often of little help in trying to make sense of how various preferred shares work.

… and there’s gold down in the comments section …

Click for Big

I’m grateful to Rob Carrick for kindly quoting me in his piece Amid a long bear market for preferred shares come glimpses of why you might want them in your portfolio:

“Common share dividends can be cut quite easily,” said James Hymas, president of Hymas Investment Management Inc. and an authority on preferred shares. “Preferred share dividends can only be cut when the common share dividend goes to zero.”
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The preferred share index was down more than 30 per cent from its pre-pandemic peak to its March 23 trough, but then bargain hunters stepped in. “There was a growing sense that the yields available were completely ridiculous,” Mr. Hymas said. “At the bottom, you had the bluest of the blue chip companies yielding 7 per cent on their dividends.”

A quick refresher on falling share prices and dividends: When stocks fall in price, their dividend yield rises. Mr. Hymas said that six months ago, rate reset preferred yields were in the 5.5 to 5.75 per cent range.
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Preferred share dividends are more secure than common share dividends, but defaults have happened in rare cases. Mr. Hymas said these defaults are rare because the total amount of preferred share dividends paid out by companies tends to be a comparatively small corporate expense. Also, a company is considered to be financially failing when it suspends preferred share dividends. “It is extremely difficult for a company to get financing once it has pulled that trigger.”

There are two main types of preferred shares – rate resets and perpetuals, which pay a fixed dividend. Perpetuals typically behave more like bonds, rising in price when rates fall and losing ground when rates rise. However, Mr. Hymas said perpetuals have been lumped in with rate resets lately and have not done well, either.
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Why consider rate reset preferreds at all, then? Mr. Hymas says their yields are attractive now and would remain so even if they undergo a dividend reset at today’s depressed rates. And, as we wait for the pandemic’s impact on the economy to hurt corporate profits, there’s the added level of security over common share dividends.

The do-not-ignore caveat: Forget about preferred shares altogether if you want a secure investment that doesn’t change much in price. “Preferred shares are volatile beasts and you shouldn’t buy them for preservation of capital,” Mr. Hymas said. “They are all about preservation of income.”

It is a pity that the article uses Current Yield to illustrate the reward side of the case in favour of preferreds, instead of calculating the yield properly as with the yield calculator for Resets. This inaccuracy is particularly glaring with respect to BAM.PR.B, a Floater paying 70% of Canada Prime based on par, so (2.45% * 70%) * 25 = 1.715% * 25 = 0.42875 p.a. The article touts a Current Yield of 9.1% at a price of 7.64, implying a dividend rate of $0.69524 p.a., or 2.78% of par, implying Canada Prime of 3.97% …. this is consistent with the March dividend of $0.172813 … prime hit 3.95% in October 2018 and was reduced to 3.45% in early March 2020 and then to 2.95% in mid March 2020 and then to 2.45% in late March 2020. Some people are going to be awfully disappointed.

John Heinzl was kind enough to quote me in his recent piece Amid dividend cuts, income investors can still find safety:

James Hymas, president of Hymas Investment Management, said the risk of banks cutting dividends is “so small that it cannot be quantified.”

“The saving grace in all of this is that after the credit crunch the regulators really went to town, insisting on higher capital levels,” Mr. Hymas said in an interview. “So the banks have an enormous shock absorber … in terms of their capital and their size and their protection from competition.”

Rob Carrick was kind enough to quote me in his piece A close-up look at preferred share ETFs, a mega-hit with investors turned surprise money-loser:

The people selling preferred shares and the ETFs that hold them include investors who used rate reset preferreds as a way to profit from rising interest rates, said James Hymas, a preferred-share specialist who manages the Malachite Aggressive Preferred Fund for high-net-worth investors.

“The other class of sellers are people who are selling just because these shares are going down,” Mr. Hymas said. “They’ve take pretty significant losses in the last eight months or so and they’re saying, ‘I’m out.’”

Mr. Hymas’s guideline for investing in preferred shares is that you should only use money you’re pretty sure you’re not going to need for 10 years or more. That way, you can ride through the periods of volatility that seem to be inevitable in a world where interest rates keep defying expectations. Pref shares are particularly attractive in non-registered accounts, where the dividend tax credit applies.
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Bond yields could definitely fall further, so there’s a risk that the yield from rate reset preferreds might be lower still. But Mr. Hymas points out that there’s nothing exceptional about holding income-producing investments that renew at lower yields.

This happens all the time when investors use five-year ladders of guaranteed investment certificates. That’s where you invest equal amounts in GICs with terms of one through five years and then invest maturing GICs back into a new five-year term. Anyone who has done this in recent years knows that it’s common to renew at lower rates.

It’s also important to understand that the problems faced by preferred share ETFs have nothing to do with the quality of the securities they hold. While Mr. Hymas points out that some less financially solid companies have entered the preferred share market in the past 10 years or so, most issuers are big banks and other blue chips that can be relied on to pay their dividends.

Preferred share ETFs are a hostage to interest rates, then. The rate reset shares they mostly or exclusively hold are pummelled when rates fall and they’ll have their day when rates rise. “As a matter of fact, I think they’re going to shine even if things stay the way they are now,” Mr. Hymas said. “I believe they’re totally oversold at this point.”

John Heinzl was kind enough to quote me in his latest piece, Winners and Losers in the Bond-Yield Collapse:

If you haven’t checked guaranteed investment certificate rates recently, you’re in for a shock. After climbing for most of 2018, GIC yields have gone into reverse. A five-year GIC at Tangerine, for instance, now pays just 2.5 per cent annually, down from 3.1 per cent as recently as November. Government bonds are even less attractive. The five-year Canada bond now yields less than inflation – the Consumer Price Index rose 1.5 per cent in February – which means bond investors are earning a negative real return, said James Hymas of Hymas Investment Management. “And that’s before taxes,” he said.