PrefBlog

Andrew Allentuck was kind enough to quote me in his January, 2015, piece Rush to liquidity leads to junk sell-off:

Given the higher level of risk caused by increased duration and the reduced liquidity caused by a bank’s need to cut holdings of dicey bonds, spreads between corporate bond prices and, especially, subinvestment-grade bonds are going to increase, says James Hymas, president of Hymas Investment Management Inc. in Toronto: “It is liquidity, not default risk, that is moving prices and yields in the junk debt market.”

Andrew Allentuck was kind enough to quote me in his November, 2014, piece Bonds can improve portfolio stability:

Still, care should be taken not to err too far on the side of safety. “When you compare a 10-year – and longer – Government of Canada bond with a high, investment-grade corporate bond of similar term, you can see a spread of 150 bps,” says James Hymas, president of Hymas Investment Management Inc. in Toronto. “The spread on yield is not all compensation for risk. Only 20 bps to 30 bps covers the credit risk. The rest is liquidity, and most retail investors give up too much yield to get the liquidity.”

Andrew Allentuck was kind enough to quote me in his November, 2014, piece “Burrito bonds” may cause indigestion:

The 8% cash interest payment is £80 a year on the £1,000 note, or £320 over four years. The weekly free burrito boosts the return. During the four-year term, a bondholder would get 208 free burritos. Each burrito costs £6; that’s £1,248 worth of burritos. Add the £320 cash interest and the total return on the investment would be £1,568 – or 157% of an interest-equivalent return.

In contrast, the Bank of England currently offers 1.5% on its five-year gilts. On a £1,000 note, that would buy you two and half burritos a year. Not surprising, the burrito bond issue was heavily oversubscribed, given the current climate of low interest rates that provide insufficient income.

Even without the nosh, the Chilango bond would find takers, says James Hymas, president of Hymas Investment Management Inc. in Toronto, “especially when you offer 8% on a bond.”

Chilango has very fancy website and trumpet the success of the bond issue.

Andrew Allentuck was kind enough to quote me in his October, 2014, piece It’s time to get used to low interest rates:

So, how long can the price of money hover in the low single digits?

“Yields at present are not sustainable, for real rates are below the replacement cost of capital,” says James Hymas, president of Hymas Investment Management Inc. in Toronto. “However, if we get into deflation, then the negative real interest rates prevailing now will turn positive. For now, investor sentiment does not show deflationary expectations, but there are many tripwires in the Middle East, Ukraine, and in the Baltic republics.”

Andrew Allentuck was kind enough to quote me in his October, 2014, piece Product shelf now includes green bonds:

In January 2014, the Commonwealth of Massachusetts issued a green bond called the Juvenile Justice Pay for Success Initiative. That US$9-million issue – and companion issues from Bank of America in negotiation at time of writing – are designed to provide funds to deter young criminals from committing more crimes.

Each person the program keeps out of jail for a year saves Massachusetts US$12,500 a year, according to a Bloomberg LP report. The state would win, social service agencies would win and the deterred criminals presumably would win. It’s all good economics designed to capture and monetize external matters, but there’s a critical flaw in the plan: those who are to be deterred have no direct interest in paying the bondholders.

It’s early in the life of these bonds and, so far, there have been no defaults. But bonds with an iffy payment mechanism need justification beyond yield to maturity.

These “stay out of jail” bonds were priced with huge payoffs if they work – and, of course, big losses if they don’t. In August 2012, the State of New York issued a US$9.6-million “social impact bond” designed to reduce recidivism. The investor, Goldman Sachs Group Inc. in this case, will receive US$9.6 million. But if recidivism were to drop by more than 10%, Goldman would get a payoff of up to US$2.1 million. If recidivism does not drop by at least that much, Goldman could lose as much as US$2.4 million.

The balance point is a change of plus or minus 10% in the recidivism rate of a defined set of convicted felons. “The risk is great,” says James Hymas, president Hymas Investment Management Inc. in Toronto. “And this is really equity in bond clothing.”

Andrew Allentuck was kind enough to quote me in his piece The return of the 50-year bond:

U.S. pension fund regulation has put more weight on long bonds in pension fund portfolios, encouraging them to buy more long-dated government debt to match long-term liabilities. Canadian regulators are taking a similar course, notes James Hymas, president of Toronto-based Hymas Investment Management Inc. All of this has pushed up the prices of mid- to long-term bonds.
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The reversion to historical interest rates, which parallel inflation, has to take place – someday. As Hymas explains: “The current situation of low bond yields, which barely cover inflation running at 1.5% per year, cannot last. Doing that with 50-year government debt is not prudent for anybody who does not need half a century’s worth of liquidity.”

Andrew Allentuck was kind enough to quote me in his latest piece for Investment Executive, Are “CoCos” a good fit for your clients?:

“They can call these bonds Tier 1 capital, which is equivalent to common equity,” says James Hymas, president of Hymas Investment Management Inc. in Toronto, “but [the bonds] get a better or more efficient treatment of the cost on income statements. A lot of portfolio managers will buy them because they have a mandate to invest in bonds, and these hybrids meet the definition of a bond and have terrific interest. Clients may be naive enough to accept these hybrids for their portfolios. But what clients forget is that in exchange for a yield pickup of a few hundred basis points over other corporate debt, a loss could approach 100%.”

In the search for yield, hybrids are the latest twist in the old idea of compromising the promise of a traditional bond to pay interest and principal on time, Hymas adds: “Many of these structures will go into bond indices. Index funds would have to buy them and some fund managers would then have to take them on, too.

“I would not be averse to buying them,” he continues. “But I would do it for a bond portfolio, which the client fully understands and accepts.”

Andrew Allentuck was kind enough to quote me in his recent Investment Executive piece, Some Bad Omens for Bonds:

Liquidity can be an issue for corporate issues as well. For example, an A-rated Canadian Utilities Ltd. issue due November 2022 was recently priced to yield 3.67%, a 100-bps spread over a federal issue of similar term. And of that 100-bps point spread, no more than 20 bps can be attributed to default risk, says James Hymas, president of Hymas Investment Management Inc., a specialty fixed-income investment firm in Toronto. As the credit rating declines, he adds, default risk rises, but the largest premium remains the illiquidity premium.

Andrew Allentuck was kind enough to quote me in his piece Five signs your financial manager is not working in your best interest:

2. Your broker cannot explain why he or she wants you to be in a certain asset. Then you should seek someone who can make sense. “You have to be able to understand how an asset fits into your overall plan,” says James Hymas, President of Hymas Investment Management Inc. a Toronto-based specialist in preferred share investing. Just picking up stocks when they are cheap is no way to build a portfolio with a purpose, he adds.

I facetiously suggested that sign #1 should be: ‘He’s breathing!’

Rob Carrick was kind enough to include PrefInfo.com in his article titled Bookmark this: Rob Carrick’s nine favourite investing websites:

It is staggering how complex preferred shares are. They’re full of minute details that can trip up investors who don’t have a resource like this website to help them understand the terms and condition of what’s available. The data here is provided by James Hymas, one of the country’s top preferred share experts. For commentary on preferred shares, try Mr. Hymas’s PrefBlog.