PVS Annual Report, 2014

May 10th, 2015

Partners Value Split Corp. has released its Annual Report to December 31, 2014.

The company has the following issues outstanding: PVS.PR.A, PVS.PR.B, PVS.PR.C and PVS.PR.D.

Figures of interest are:

MER: I suggest it is best to include the amortization of share issue costs in MER – after all, this is a charge against the stated value of the company. Therefore, expenses were $382,000 (regular expenses) + $1,443,000 (amortization) = $1,825,000 for the on assets of $2.650-billion (see below) or 7bp p.a..

Average Net Assets: We need this to calculate portfolio yield and MER. There were negligible capital transactions, so we’ll just take the average of the beginning and end of period assets (including preferred shares) so: (3.108-billion + 2.191-billion)/2 = 2.650-billion

Underlying Portfolio Yield: Total Income of $40.1-million divided by average net assets of $2,650-million is 1.51% p.a..

Income Coverage: Net income of $39.760-million less amortization of $1.443-million is $38.317-million to cover senior preferred dividends of $26.097-million is 147%. However, I consider it prudent to include the $10-million stated entitlement of the Junior preferreds, even though none of this was actually paid in 2014 because the Juniors can be retracted at any time, which could prove embarrassing in times of extreme stress. So I’d say income coverage is 106%.

May 8, 2015

May 8th, 2015

Jobs, jobs, jobs!

April’s job-creation score was better, March was worse, and the U.S. jobless rate crept closer to the Federal Reserve’s moving target for full employment.

The 223,000 increase in payrolls last month followed a revised 85,000 gain in March that was the smallest since June 2012, figures from the Labor Department showed Friday in Washington. The jobless rate fell to 5.4 percent, the lowest since May 2008, from 5.5 percent.

Wage growth remained limited, with average hourly earnings rising 0.1 percent in April after a revised 0.2 percent March gain that was weaker than initially reported. The median forecast in a Bloomberg survey projected a 0.2 percent increase for last month.

Compared with a year earlier, hourly pay was up 2.2 percent last month, holding within the narrow range tracked over the past four years.

The report also included positive news on the size of the labor force. The participation rate, which indicates the share of working-age people who are employed or looking for work, increased to 62.8 percent from 62.7 percent in March, which matched the lowest since 1978. The gain was paced by 45-to-64 year-old Americans.

The Fed now defines full employment as between 5 percent and 5.2 percent, according to projections released after their March 17-18 meeting. The range was lowered from 5.2 percent to 5.5 percent after the jobless rate reached the top of the scale in February.

In Canada, not so much:

The Target effect is denting Canada’s jobs numbers.

Employers shed a total of 19,700 jobs last month, according to Statistics Canada, the most since August, as retailers eliminated thousands of sales, cashiers and clerks positions.

The numbers show the impact of a raft of store closings amid upheaval in the sector, including Target Canada, Best Buy, Mexx, Smart Set, Indigo Books and Sony. The sector may be in flux, but it remains the largest source of employment in the country.

The retail sector posted a loss of 20,500 workers, Statscan said Friday, leaving employment levels flat from a year earlier. Monthly jobs numbers can be volatile, but separate payrolls data show the retail sector has contracted for four months in a row.

In January, Target said it was pulling out of Canada, an abrupt move that spelled job losses for 17,600 of its workers over the ensuing months and put pressure on hundreds of firms that served the chain, forcing some of them to lay off staff, too.

Across Canada, the jobless rate stayed at 6.8 per cent as fewer people looked for work.

Monthly numbers can swing up and down, but smoothed-out averages show employment has grown by just 2,600 jobs on average per month in the past half-year. Year-over-year employment growth has been stuck below 1 per cent for the past 13 months.

Other sectors shed workers as well last month, in construction and information services. Natural resources were little changed in the month, but are down 6.6 per cent from a year earlier, reflecting the oil price slide.

On the other hand, it’s my understanding that in Toronto, house flippers have basically been priced out of the market by eager-to-buy veterans of too many bidding wars. In the States, not so much:

Real estate buyers seeking money to renovate and flip U.S. houses are getting help from some of the world’s biggest investment firms.

Colony Capital Inc., Blackstone Group LP and Cerberus Capital Management are among the companies that have started making bridge loans to investors who buy homes to sell them quickly for a profit. Borrowing costs — traditionally the highest in residential lending — are tumbling as the firms compete for customers.

The foray represents a deepening bet on the housing market by Wall Street-backed companies, many of which have built rental-home empires during the past three years and started specialty-lending businesses to finance smaller investors. Big firms with deep pockets and access to cheap capital may have an edge over local private lenders that have dominated flipper financing.

Home flippers are benefiting from rising prices, limited new construction and a shortage of inventory on the market. While quick resales have decreased from the start of the housing market’s rebound, when investors snapped up discounted distressed homes, profits are getting bigger.

The average gross profit for completed flips in the first quarter was $72,450, up from $61,684 a year earlier and the highest in records dating to 2011, according to a report Thursday from RealtyTrac, a real estate data firm. Markets with the highest average gross return on investment included Baltimore, central Florida and Detroit.

‘Who will watch the watchers?’ query the wise men in Congress. Watcher watchers!

Senate Banking Committee Chairman Richard Shelby is putting the finishing touches on a bill that could give Congress more power over the New York Fed and create a commission with authority to propose sweeping reforms of the entire Fed system.

Other senators want to curb the Fed’s ability to bail out banks during a financial meltdown and increase transparency of its regulation.

“Shelby wants to do something with the Fed,” said Ed Mills, a financial-policy analyst at FBR & Co. in Arlington, Virginia, and a former adviser to Democrats in the House and Senate. “It seems as if they’re going to have something in here that is additional oversight of the Fed or rebalancing some of the power internally at the Fed, whether staff resources or more transparency.”

There’s really only one structural problem with the Fed: it has responsibility for both bank supervision and monetary policy. While there are good arguments to be made in favour of combining the mandates, as has been discussed previously on PrefBlog (see, for example, September 10, 2008 and Willem Buiter’s Prescription), I continue to think that puts just too much power in the hands of one institution.

As far as ‘Fed bailouts of Wall Street Banks’ are concerned – well, for the most part that’s a canard. The explicit bail-outs were done by the Treasury with the authority of congress. The Fed simply lent to solvent banks against adequate collateral … which is what Central Banks are supposed to do during a liquidity crisis. They can, however, be criticized for not ensuring that these loans were not made at penalty rates:

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

Brookfield Investments Corporation, proud issuer of BRN.PR.A (which is not tracked by HIMIPref™) has been confirmed at Pfd-2(low) by DBRS:

DBRS Limited (DBRS) has today confirmed the rating of Pfd-2 (low) with a Stable trend for the Senior Preferred Shares of Brookfield Investments Corporation (Brookfield Investments or the Company). The rating continues to be based on the strength of Brookfield Investments’ owner (Brookfield Asset Management Inc. or BAM; rated A (low), Stable trend by DBRS), as well as the Company’s relatively stable portfolio of real estate and asset management investments, with strong asset and dividend coverage. The rating remains limited by Brookfield Investments’ exposure to the volatility of overall capital markets, concentration of investments in the real estate sector, lack of investment restrictions and the relative illiquidity of unlisted investments.

It was another strong-mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 19bp, FixedResets up 33bp and DeemedRetractibles off 2bp. The strength in FixedResets came at the end of the day:

TXPL
TXPL_150508
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A Performance Highlights table of unsurprising size was unsurprisingly dominated by winning FixedResets, but there were a few losers in the mix. Volume was quite high.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

impVol_TRP_150508
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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.48 to be $0.96 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.12 cheap at its bid price of 25.04.

impVol_MFC_150508
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Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.K, resetting at +222 on 2018-9-19, bid at 23.52 to be $0.28 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.61 to be $0.43 cheap.

impVol_BAM_150508
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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 20.52 to be $0.60 cheap. BAM.PR.X, resetting at +180bp 2017-6-30 is bid at 18.51 and appears to be $0.57 rich.

impVol_FTS_150508
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FTS.PR.H, with a spread of +145bp, and bid at 16.63, looks $0.76 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 22.14 and is $0.52 rich.

pairs_FR_150508
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Investment-grade pairs now predict an average over the next five years of about 0.35%, but TRP.PR.A / TRP.PR.F is an outlier at -0.78% and BNS.PR.Y / BNS.PR.D is at +0.84%. On the junk side, the FFH.PR.E / FFH.PR.F pair is at -0.68% while DC.PR.B / DC.PR.D is now at 0.95%.

pairs_FF_150508
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Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

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 -0.4202 % 2,328.4
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.4202 % 4,071.1
Floater 3.12 % 3.22 % 55,010 19.15 4 -0.4202 % 2,475.2
OpRet 4.41 % -1.93 % 38,432 0.15 2 -0.0196 % 2,770.8
SplitShare 4.57 % 4.78 % 61,960 3.36 3 0.0267 % 3,228.0
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0196 % 2,533.6
Perpetual-Premium 5.45 % 1.43 % 67,136 0.08 18 0.0763 % 2,522.3
Perpetual-Discount 5.01 % 5.00 % 120,224 15.42 15 0.1884 % 2,805.7
FixedReset 4.38 % 3.73 % 274,342 16.32 86 0.3291 % 2,421.2
Deemed-Retractible 4.92 % 3.04 % 110,198 0.22 36 -0.0243 % 2,648.9
FloatingReset 2.59 % 2.93 % 65,325 6.20 7 -0.1033 % 2,333.4
Performance Highlights
Issue Index Change Notes
PWF.PR.P FixedReset -1.77 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 18.87
Evaluated at bid price : 18.87
Bid-YTW : 3.57 %
GWO.PR.N FixedReset -1.66 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.80
Bid-YTW : 6.50 %
FTS.PR.G FixedReset -1.32 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 21.39
Evaluated at bid price : 21.71
Bid-YTW : 3.79 %
BAM.PR.K Floater -1.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 15.30
Evaluated at bid price : 15.30
Bid-YTW : 3.28 %
MFC.PR.N FixedReset -1.13 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.70
Bid-YTW : 4.32 %
BAM.PF.F FixedReset 1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 23.14
Evaluated at bid price : 24.80
Bid-YTW : 3.97 %
HSE.PR.A FixedReset 1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 17.45
Evaluated at bid price : 17.45
Bid-YTW : 4.08 %
NA.PR.S FixedReset 1.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 23.29
Evaluated at bid price : 25.12
Bid-YTW : 3.39 %
MFC.PR.K FixedReset 1.16 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.52
Bid-YTW : 4.28 %
CU.PR.D Perpetual-Discount 1.16 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-09-01
Maturity Price : 25.25
Evaluated at bid price : 25.25
Bid-YTW : 4.81 %
MFC.PR.L FixedReset 1.18 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.14
Bid-YTW : 4.55 %
BAM.PF.G FixedReset 1.46 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 23.14
Evaluated at bid price : 24.96
Bid-YTW : 3.94 %
FTS.PR.M FixedReset 1.53 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 23.24
Evaluated at bid price : 25.15
Bid-YTW : 3.51 %
TD.PF.C FixedReset 1.55 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 22.89
Evaluated at bid price : 24.22
Bid-YTW : 3.39 %
BAM.PR.T FixedReset 1.69 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 21.10
Evaluated at bid price : 21.10
Bid-YTW : 4.12 %
BAM.PR.X FixedReset 1.98 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 18.51
Evaluated at bid price : 18.51
Bid-YTW : 4.11 %
BAM.PF.A FixedReset 2.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 23.24
Evaluated at bid price : 24.76
Bid-YTW : 3.99 %
TRP.PR.C FixedReset 2.45 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 18.01
Evaluated at bid price : 18.01
Bid-YTW : 3.63 %
CIU.PR.C FixedReset 2.85 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 16.26
Evaluated at bid price : 16.26
Bid-YTW : 3.74 %
Volume Highlights
Issue Index Shares
Traded
Notes
CU.PR.F Perpetual-Discount 125,058 TD crossed 72,500 at 23.35; RBC crossed 52,000 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 22.94
Evaluated at bid price : 23.25
Bid-YTW : 4.83 %
RY.PR.M FixedReset 102,306 RBC bought blocks of 10,000 and 20,000 from TD, both at 24.84, then crossed 24,000 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 23.05
Evaluated at bid price : 24.76
Bid-YTW : 3.57 %
BAM.PF.D Perpetual-Discount 96,307 RBC crossed blocks of 25,000 and 60,600 at 23.45.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 23.15
Evaluated at bid price : 23.47
Bid-YTW : 5.27 %
FTS.PR.M FixedReset 86,240 Desjardins crossed 75,000 at 25.09.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 23.24
Evaluated at bid price : 25.15
Bid-YTW : 3.51 %
TRP.PR.F FloatingReset 55,200 RBC crossed 40,000 at 18.97.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 19.04
Evaluated at bid price : 19.04
Bid-YTW : 3.39 %
SLF.PR.A Deemed-Retractible 54,594 Scotia crossed 40,000 at 24.75.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.71
Bid-YTW : 4.99 %
There were 48 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
RY.PR.H FixedReset Quote: 24.17 – 24.75
Spot Rate : 0.5800
Average : 0.3928

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 22.90
Evaluated at bid price : 24.17
Bid-YTW : 3.42 %

ENB.PR.D FixedReset Quote: 20.00 – 20.45
Spot Rate : 0.4500
Average : 0.2761

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 20.00
Evaluated at bid price : 20.00
Bid-YTW : 4.42 %

BMO.PR.T FixedReset Quote: 24.05 – 24.60
Spot Rate : 0.5500
Average : 0.3993

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 22.85
Evaluated at bid price : 24.05
Bid-YTW : 3.42 %

BMO.PR.W FixedReset Quote: 24.01 – 24.37
Spot Rate : 0.3600
Average : 0.2258

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 22.81
Evaluated at bid price : 24.01
Bid-YTW : 3.40 %

BMO.PR.S FixedReset Quote: 24.46 – 24.88
Spot Rate : 0.4200
Average : 0.3022

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 23.04
Evaluated at bid price : 24.46
Bid-YTW : 3.44 %

BAM.PR.K Floater Quote: 15.30 – 15.67
Spot Rate : 0.3700
Average : 0.2589

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-08
Maturity Price : 15.30
Evaluated at bid price : 15.30
Bid-YTW : 3.28 %

Fortis Releases FTS.PR.H Conversion / Reset Details

May 8th, 2015

I complained earlier regarding the lack of communication regarding the extension and reset of FTS.PR.H.

An officer of Fortis has sent me a copy of the official notification to Computershare:

St. John’s, NL (April 28, 2015):

Effective April 28, 2015, Fortis Inc. (the “Corporation”) announced that it does not intend to exercise its right to redeem all or any part of the currently outstanding Cumulative Redeemable Five-Year Fixed Rate Reset First Preference Shares, Series H of the Corporation (the “Series H shares”) on June I, 2015.

There are currently 10,000,000 Series H shares outstanding.

Subject to certain conditions set out in the short form prospectus of the Corporation dated January 18, 2010 relating to the issuance of the Series H shares, the holders of the Series H shares have the right to convert all or part of their Series H shares, on a one-for-one basis, into Cumulative Redeemable Floating Rate First Preference Shares, Series I of the Corporation (the “Series I shares”) on June l, 2015 (the “Conversion Date”).

On such date, holders who do not exercise their right to convert their Series H shares into Series I shares will continue to hold their Series H shares.

The foregoing conversion right is subject to the following:
i. If the Corporation determines that there would be less than 1,000,000 Series I shares outstanding after the Conversion Date, then holders of Series H shares will not be entitled to convert their shares into Series I; and
ii. Alternatively, if the Corporation determines that there would remain outstanding less than 1,000,000 Series H shares after the Conversion Date, then all remaining Series H shares will automatically be converted into Series I shares on a one-for-one basis on the Conversion Date.

In either case, the Corporation will give written notice to that effect to holders of Series H shares no later than May 25, 2015.

The dividend rate applicable for the Series H shares for the five-year period from and including June 1, 2015 to but excluding June 1, 2020, and the dividend rate applicable to the Series I shares for the three-month period from and including June I, 2015 and ending on and including August 31, 2015, will be determined on May 4, 2015 and notice of such dividend rates shall be provided to the holders of the Series H shares on that day.

Beneficial owners of Series H shares who wish to exercise their conversion right, should communicate with their broker or other nominee to obtain instructions for exercising such right during the conversion period, which runs from May 4, 2015 until 5:00 p.m. (Eastern) on May 19, 2015.

Inquiries should be directed to Mr. Jim Spinney, Treasurer, Fortis at 709.737.2902.

Signed:
[signature]
Karl W. Smith
Executive Vice President, Chief Financial Officer

All that was provided regarding the reset was:

St. John’s, NL (May 4, 2015):

Fortis Inc. (the “Corporation”) hereby provides notice to the holders of its Cumulative Redeemable Five Year Fixed Rate Reset First Preference Shares, Series H of the Corporation (the “Series H shares”) of the following dividend rates, in each case payable if, as and when declared by the Board of Directors of the Corporation:

1. $0.15625 per Series H share, being the fixed dividend rate payable quarterly on the first day of’March, June, September and December of each year during the five-year period from and including June 1, 2015 to but excluding June 1, 2020; and

ii. $0.13125 per share on the Cumulative Redeemable Floating Rate First Preference Shares, Series I of the Corporation (the “Series I shares”), being the floating dividend rate applicable to the Series I shares for the 3-month period from and including June 1, 2015 and ending on and including August 31, 2015,

in each case determined in accordance with the corresponding rights, privileges, conditions and restrictions attached to the Series H shares and Series I shares, respectively, as a class, as set out in the short form prospectus of the Corporation dated January 18, 20 I 0 relating to the issuance of the Series H shares.

Inquiries should be directed to Mr. Jim Spinney, Treasurer, Fortis at 709.737.2902.

Signed:
[signature]
Karl W. Smith
Executive Vice President, Chief Financial Officer

The officer explained:

Fortis has provided the conversion notification as well as the new yields and notification deadlines to the official shareholders of Series H – that being CDS (Computershare). CDS confirmed that they have notified the brokers who in turn should notify the beneficial bondholders.

Well, that’s the good old book-based system for you! There’s only one registered shareholder – and as noted earlier, the prospectus states:

The Corporation will, on the Fixed Rate Calculation Date, give written notice of the Annual Fixed Dividend Rate for the ensuing Subsequent Fixed Rate Period to the registered holders of the then outstanding Series H First Preference Shares.

So, sure, the method they’ve chosen appears to be legal enough to my non-securities-lawyer eyes … but why do they do it this way? They are diligent enough to have a web page dedicated to their preferred shares, which includes links to the prospectuses … and that’s very good! That puts them a cut above most issuers. But why not take that one extra step and communicate with holders – and, more importantly, prospective holders – regarding details of the reset? BCE includes links to notices of this kind on their preferred share page – how difficult could it be to send a copy of notices of this nature to ‘the website guy’ who is already in charge of putting up the press releases?

So anyway, yeah, FTS.PR.H will reset at a dividend rate of 2.50% paid on par value, “a stunning 41% reduction in dividend from the original 4.25%” as reported earlier. FTS.PR.I will float at 145bp over three-month bills, reset quarterly. Holders of FTS.PR.H must notify the company through their broker and Computershare by 5:00 p.m. (Eastern) on May 19, 2015; but note that your broker’s internal deadline will be earlier than this; and also note that May 18 is the Victoria Day holiday in most of Canada and most brokers will be closed. So if you intend to convert, make sure you check with your broker regarding their internal deadlines!

I will post with my recommendation regarding whether or not to convert next week.

May 7, 2015

May 7th, 2015

I hear there’s a bit of backlash against the lawyers, accountants and stockbrokers crossing the Alberta-Saskatchewan border in search of a better life:

albertaExodus
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The Swiss central bank accumulated a lot of foreign currency as it attempted to defend the indefensible CHF / EUR peg. Guess what they’ve done with all that cash!

The Swiss National Bank had a rough quarter in Q1 as the decision to abandon the increasingly unsustainable EURCHF floor (an event which marked an implicit admission that central banks are not all-powerful after all) blew a $32 billion hole in the central bank’s euro reserves. That, however, wasn’t the most remarkable takeaway from the SNB’s quarterly report.

More interesting than the massive loss was the line item in the SNB’s balance sheet which shows that 18% of the bank’s assets are held in foreign stocks.

By “blew a hole”, he must be referring to the P&L – the balance sheet bloated, of course.

SNBStocks
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Liquidity problems continue to attract attention:

As bonds tumbled across Europe, the bid-ask spread, a gauge of the market’s depth derived from the difference in prices or yields between buyers and sellers, widened. It reached 0.27 basis point for German 10-year bunds on Thursday, up from as low as 0.1 in March and an average of 0.2 this year, data compiled by Bloomberg show.

That means sellers may be getting squeezed by a shortage of buyers. Adding to the risk of holding bonds, implied option volatility on German 10-year bund futures contracts surged in the past week to the highest since August 2012.

Bonds have sold off in a global rout that wiped more than $430 billion from the market in the past week. A capitulation on long positions, or bets that prices will rise, was triggered by a shift in sentiment as improving economic data and rising oil prices prompted investors to revolt against record-low yields.

Yet the magnitude of the decline wasn’t justified by those economic numbers, none of which points to a big jump in inflation or interest rates, according to Rabobank’s McGuire.

The yield on Germany’s 10-year bund, the benchmark euro-zone security, has surged 43 basis points since the start of last week to a high for 2015. A basis point is 0.01 percentage point.

The jump suggests that increased regulation may be hampering dealers’ ability to make markets and that bond-purchase programs such as the European Central Bank’s quantitative-easing plan have cut the amount of securities in circulation.

The Canadian preferred share market was on fire today, albeit very unevenly. Can I call this “on mixed fire”? PerpetualDiscounts gained 43bp, FixedResets were up 62bp, while DeemedRetractibles were off 6bp. The volume highlights table is, predictably, both lengthy and dominated by FixedResets. Volume was very high.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

impVol_TRP_150507
Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.24 to be $0.95 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $0.86 cheap at its bid price of 25.11.

impVol_MFC_150507

Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.N, resetting at +230 on 2020-3-19, bid at 23.97 to be $0.51 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.52 to be $0.47 cheap.

impVol_BAM_150507
Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 20.34 to be $0.56 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 23.16 and appears to be $0.72 rich.

impVol_FTS_150507
Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.70, looks $0.73 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 22.10 and is $0.50 rich.

pairs_FR_150507
Click for Big

Investment-grade pairs now predict an average over the next five years of about 0.40%, but TRP.PR.A / TRP.PR.F is an outlier at -0.77% and BNS.PR.Y / BNS.PR.D is at +0.70%. On the junk side, the BRF.PR.A / BRF.PR.B pair is at -0.72% while FFH.PR.C / FFH.PR.D is at +1.20%.

pairs_FF_150507
Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

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 0.0000 % 2,338.2
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.0000 % 4,088.2
Floater 3.11 % 3.21 % 55,369 19.19 4 0.0000 % 2,485.7
OpRet 4.41 % -2.41 % 38,332 0.15 2 0.1571 % 2,771.3
SplitShare 4.57 % 4.76 % 64,240 3.36 3 -0.0933 % 3,227.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1571 % 2,534.1
Perpetual-Premium 5.45 % 1.73 % 68,137 0.08 18 -0.0501 % 2,520.3
Perpetual-Discount 5.02 % 5.00 % 121,959 15.42 15 0.4341 % 2,800.4
FixedReset 4.40 % 3.81 % 277,275 16.21 86 0.6169 % 2,413.3
Deemed-Retractible 4.92 % 3.42 % 114,117 0.30 36 -0.0564 % 2,649.6
FloatingReset 2.59 % 2.96 % 64,301 6.20 7 0.5561 % 2,335.9
Performance Highlights
Issue Index Change Notes
SLF.PR.G FixedReset -1.12 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.60
Bid-YTW : 6.75 %
NA.PR.S FixedReset 1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 23.19
Evaluated at bid price : 24.85
Bid-YTW : 3.50 %
ENB.PR.B FixedReset 1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 19.76
Evaluated at bid price : 19.76
Bid-YTW : 4.56 %
BAM.PR.T FixedReset 1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 20.75
Evaluated at bid price : 20.75
Bid-YTW : 4.27 %
CU.PR.G Perpetual-Discount 1.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 23.04
Evaluated at bid price : 23.35
Bid-YTW : 4.81 %
ENB.PF.E FixedReset 1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 21.91
Evaluated at bid price : 22.40
Bid-YTW : 4.41 %
ENB.PF.C FixedReset 1.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 21.82
Evaluated at bid price : 22.25
Bid-YTW : 4.42 %
TRP.PR.D FixedReset 1.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 22.78
Evaluated at bid price : 23.83
Bid-YTW : 3.68 %
BAM.PF.G FixedReset 1.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 23.01
Evaluated at bid price : 24.60
Bid-YTW : 4.07 %
BMO.PR.W FixedReset 1.23 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 22.78
Evaluated at bid price : 23.94
Bid-YTW : 3.47 %
BAM.PR.X FixedReset 1.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 18.15
Evaluated at bid price : 18.15
Bid-YTW : 4.29 %
BAM.PF.D Perpetual-Discount 1.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 23.07
Evaluated at bid price : 23.39
Bid-YTW : 5.29 %
BAM.PF.A FixedReset 1.38 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 23.03
Evaluated at bid price : 24.25
Bid-YTW : 4.16 %
TRP.PR.F FloatingReset 1.39 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 19.02
Evaluated at bid price : 19.02
Bid-YTW : 3.40 %
ENB.PR.T FixedReset 1.43 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 20.59
Evaluated at bid price : 20.59
Bid-YTW : 4.54 %
BAM.PF.C Perpetual-Discount 1.45 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 22.76
Evaluated at bid price : 23.06
Bid-YTW : 5.31 %
NA.PR.W FixedReset 1.46 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 22.94
Evaluated at bid price : 24.35
Bid-YTW : 3.45 %
ENB.PR.J FixedReset 1.48 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 21.65
Evaluated at bid price : 21.94
Bid-YTW : 4.39 %
TRP.PR.A FixedReset 1.49 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 21.11
Evaluated at bid price : 21.11
Bid-YTW : 3.66 %
ENB.PR.F FixedReset 1.49 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 20.40
Evaluated at bid price : 20.40
Bid-YTW : 4.56 %
IAG.PR.G FixedReset 1.51 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-30
Maturity Price : 25.00
Evaluated at bid price : 25.51
Bid-YTW : 3.53 %
ENB.PR.Y FixedReset 1.57 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 20.03
Evaluated at bid price : 20.03
Bid-YTW : 4.55 %
BNS.PR.Y FixedReset 1.59 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.05
Bid-YTW : 3.19 %
ENB.PR.P FixedReset 1.80 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 20.91
Evaluated at bid price : 20.91
Bid-YTW : 4.46 %
TD.PF.B FixedReset 1.84 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 22.96
Evaluated at bid price : 24.30
Bid-YTW : 3.46 %
PWF.PR.P FixedReset 1.91 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 19.21
Evaluated at bid price : 19.21
Bid-YTW : 3.60 %
BAM.PF.E FixedReset 1.94 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 22.37
Evaluated at bid price : 23.16
Bid-YTW : 4.11 %
RY.PR.Z FixedReset 2.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 23.14
Evaluated at bid price : 24.70
Bid-YTW : 3.35 %
MFC.PR.N FixedReset 2.22 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.97
Bid-YTW : 4.21 %
MFC.PR.M FixedReset 2.43 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.00
Bid-YTW : 4.26 %
TRP.PR.B FixedReset 2.69 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 15.68
Evaluated at bid price : 15.68
Bid-YTW : 3.81 %
TRP.PR.C FixedReset 2.69 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 17.58
Evaluated at bid price : 17.58
Bid-YTW : 3.82 %
IFC.PR.A FixedReset 3.70 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.00
Bid-YTW : 5.44 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.M Deemed-Retractible 80,747 Scotia crossed 75,000 at 25.36.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-07-27
Maturity Price : 25.25
Evaluated at bid price : 25.33
Bid-YTW : 3.42 %
TRP.PR.E FixedReset 43,201 Desjardins crossed 15,800 at 24.23.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 22.92
Evaluated at bid price : 24.24
Bid-YTW : 3.64 %
TD.PF.C FixedReset 42,757 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 22.73
Evaluated at bid price : 23.85
Bid-YTW : 3.52 %
ENB.PR.B FixedReset 37,690 Desjardins crossed 10,000 at 19.60.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 19.76
Evaluated at bid price : 19.76
Bid-YTW : 4.56 %
CM.PR.O FixedReset 37,659 TD crossed 17,300 at 24.51.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 23.05
Evaluated at bid price : 24.51
Bid-YTW : 3.48 %
RY.PR.H FixedReset 34,819 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 22.93
Evaluated at bid price : 24.23
Bid-YTW : 3.47 %
There were 53 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
MFC.PR.L FixedReset Quote: 22.87 – 23.64
Spot Rate : 0.7700
Average : 0.5104

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.87
Bid-YTW : 4.73 %

TD.PF.B FixedReset Quote: 24.30 – 25.00
Spot Rate : 0.7000
Average : 0.4812

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 22.96
Evaluated at bid price : 24.30
Bid-YTW : 3.46 %

CIU.PR.C FixedReset Quote: 15.81 – 17.50
Spot Rate : 1.6900
Average : 1.4748

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 15.81
Evaluated at bid price : 15.81
Bid-YTW : 3.96 %

BNS.PR.Z FixedReset Quote: 23.25 – 23.73
Spot Rate : 0.4800
Average : 0.3096

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.25
Bid-YTW : 3.79 %

BNS.PR.O Deemed-Retractible Quote: 25.68 – 26.08
Spot Rate : 0.4000
Average : 0.2443

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-06-06
Maturity Price : 25.50
Evaluated at bid price : 25.68
Bid-YTW : -1.80 %

FTS.PR.M FixedReset Quote: 24.77 – 25.25
Spot Rate : 0.4800
Average : 0.3304

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-07
Maturity Price : 23.11
Evaluated at bid price : 24.77
Bid-YTW : 3.65 %

May 6, 2015

May 7th, 2015

Here’s bit of an update on the persecution of Navinder Singh Sarao:

Sarao’s lawyer, James Lewis, disclosed the existence of a worldwide freezing order on his client’s assets that precludes him from raising the 5 million-pound ($7.6 million) bail.

Sarao has been “languishing on remand unable to meet” the bail conditions, and it’s “impossible to supply the security,” because of the freezing order, Lewis said. He also unsuccessfully applied to have a blanket ban on Internet use amended to only restrict him from trading, arguing a complete prohibition was “manifestly disproportionate.”

Sarao has been in custody since April 21, when he was arrested at the house he shares with his parents near Heathrow airport. He is being held at Wandsworth prison in London while fighting extradition to the U.S.

Roscoe rejected a request to release Sarao solely on a 50,000 pound-security put up by his parents, saying the bail amount had to satisfy her that he isn’t a flight risk.

Yep, that’s the way to do it! Set bail to a ludicrously high amount, then freeze the guy’s assets so he can’t possibly put up the money! As noted on May 1, the most recent penalty for spoofing was a sixty day trading suspension. But Sarao’s offence was blatant? Yeah, right, that’s why it took five years to find it, and why it got no mention whatsoever in the SEC report.

Selective enforcement is an affront to justice, and the anti-spoofing laws are ridiculous and unenforceable in the first place.

Fitch Ratings thinks the Canadian economy is vulnerable to condos:

There are more than 80,000 condo units under construction across Ontario, most of them in the Greater Toronto Area. That’s 50 per cent higher than just four years ago, although the number of new housing starts has fallen from its peak in 2012, Fitch said. In the face of so much supply, condo prices have remained flat across the province.

Therein lies the problem, according to Fitch.

“As a large number of units come on line, prices may soften, which could reverberate throughout the Canadian economy,” Fitch director Stefan Hilts wrote. “Lower prices would reduce the incentives to build further units, which could hit employment in the construction sector that has been buoyed by continuing price growth. This in turn could lead to more significant downside exposure.”

Yellen is trying to talk down the market (without saying “irrational exuberance”):

Federal Reserve Chair Janet Yellen, surveying the financial landscape for signs of bubbles after more than six years of near-zero rates, warned that both stocks and bonds are richly valued.

“I would highlight that equity-market valuations at this point generally are quite high,” Yellen said in Washington on Wednesday in response to a question at a forum on finance. “Now, they’re not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low, but there are potential dangers there.”

Yellen said bond yields “could see a sharp jump” when the Fed raises its benchmark interest rate. Most Fed officials predict that will happen this year for the first time since 2006.

She highlighted the term premium:

“Long-term interest rates are at very low levels, and that would appear to embody low term premiums, which can move, and can move very rapidly,” Yellen said after a speech in Washington. “We need to be attentive, and are to the possibility that when the Fed decides it’s time to begin raising rates, these term premiums could move up, and we could see a sharp jump in long-term rates.”

And the “global bond rout” has spread to Japan:

Japan’s government bonds joined a worldwide rout in sovereign debt as investors in Tokyo returned from a three-day national holiday.

The yield on the 10-year bond jumped seven basis points to 0.43 percent as of 8:52 a.m. in Tokyo from May 1, according to Japan Bond Trading Co., the nation’s largest inter-dealer debt broker. The price of the 0.4 percent debt due March 2025 fell 0.665 yen to 99.716. A basis point is 0.01 percentage point.

Meanwhile in the real economy (remember that?) productivity is falling:

Productivity over the past six months fell by the most in more than two decades, leading to increases in U.S. labor costs that threaten corporate profits.

The measure of employee output per hour decreased at a 1.9 percent annualized rate after a revised 2.1 percent drop in the prior three months, a Labor Department report showed Wednesday in Washington. The decline on average over the past two quarters was the biggest since the first six months of 1993. Expenses per worker increased more than projected at the start of the year.

A lack of business investment in new technology may mean productivity will continue to languish and limit the economic expansion’s potential. Rising labor costs without offsetting increases in efficiency would also hurt business earnings, and in turn restrain the hiring that would propel consumer spending.

But it’s an ill wind that doesn’t blow the banks any good:

The chart watchers in the stock market would like to draw your attention to notable recent moves by some large U.S. banks. JPMorgan Chase & Co.’s shares, for example, on Monday reached the highest level in 15 years. Goldman Sachs Group Inc. touched the highest price since 2008 last month and the SPDR S&P Bank ETF reached a 13-month high this week.

One obvious reason for the recent strength is a strong earnings season. The 24 companies in the KBW Bank Index posted profit growth of 8.8 percent and beat analysts’ estimates by almost 10 percent. Another reason, however, is a bit more slippery: the recent spike higher in interest rates on longer-term Treasuries. The subsequent steepening of the yield curve, it stands to reason, should be good for banks because they borrow at short-term rates and lend at long-term rates.

The sell-side old boys’ club in the States has approved an increase in tick size for smaller company shares, as a way of chipping away against hedge-fund friendly maker-taker fees:

The U.S. Securities and Exchange Commission approved a two-year program designed to test ways to boost investors’ interest in smaller stocks.

The trading experiment, championed by small-business advocates and opposed by big investors such as Fidelity Investments and D.E. Shaw & Co., will widen the minimum price at which stocks for small companies are quoted on exchanges, the SEC said Wednesday in a statement. The program would reward brokers for making markets in less-liquid stocks by widening the amount they earn when buying and selling shares.

Exchanges must start the pilot program by May 6, 2016, the SEC said. It will apply to shares of 1,400 companies with market values under $3 billion and average daily trading volume of less than 1 million shares, the SEC said.

Asset managers such as Fidelity opposed the program because they’re concerned it will raise transaction costs and probably won’t foster more initial public offerings.

Naturally, it did not occur to anybody at the SEC or the Dodd-Frank crowd in congress to do something about the ridiculous cost of going public and being a public company.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 22bp, FixedResets off 14bp and DeemedRetractibles gaining 4bp. The Performance Highlights table is dominated by losing FixedResets. Volume was average.

PerpetualDiscounts now yield 5.02%, equivalent to 6.53% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.05% so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is not now about 250bp, a very sharp narrowing from the 295bp reported April 22.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

impVol_TRP_150506
Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.19 to be $1.17 rich, while TRP.PR.B, resetting 2015-6-30 at +128, is $0.91 cheap at its bid price of 25.01.

impVol_MFC_150506
Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.K, resetting at +222 on 2018-9-19, bid at 23.33 to be $0.30 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.35 to be $0.55 cheap.

impVol_BAM_150506
Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 20.18 to be $0.53 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 22.72 and appears to be $0.50 rich.

impVol_FTS_150506
Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.60, looks $0.83 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.90 and is $0.41 rich.

pairs_FR_150506
Click for Big

Investment-grade pairs now predict an average over the next five years of about 0.30%, but TRP.PR.A / TRP.PR.F is an outlier at -0.73% and BNS.PR.Y / BNS.PR.D is at +0.96%. On the junk side, the DC.PR.B / DC.PR.D pair is at -0.78% while FFH.PR.C / FFH.PR.D is at +1.22%.

pairs_FF_150506
Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

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 0.5320 % 2,338.2
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.5320 % 4,088.2
Floater 3.11 % 3.19 % 53,826 19.23 4 0.5320 % 2,485.7
OpRet 4.42 % -1.10 % 36,036 0.15 2 0.0000 % 2,767.0
SplitShare 4.56 % 4.70 % 64,901 3.36 3 -0.1729 % 3,230.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0000 % 2,530.1
Perpetual-Premium 5.45 % 1.07 % 68,493 0.08 18 0.0153 % 2,521.6
Perpetual-Discount 5.04 % 5.02 % 122,804 15.44 15 0.2231 % 2,788.3
FixedReset 4.42 % 3.92 % 279,074 16.11 86 -0.1417 % 2,398.5
Deemed-Retractible 4.92 % 3.08 % 114,001 0.55 36 0.0443 % 2,651.1
FloatingReset 2.61 % 2.99 % 66,459 6.20 7 0.0611 % 2,322.9
Performance Highlights
Issue Index Change Notes
CIU.PR.C FixedReset -6.47 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-06
Maturity Price : 15.90
Evaluated at bid price : 15.90
Bid-YTW : 3.94 %
SLF.PR.G FixedReset -1.93 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.80
Bid-YTW : 6.61 %
BAM.PF.E FixedReset -1.73 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-06
Maturity Price : 22.12
Evaluated at bid price : 22.72
Bid-YTW : 4.21 %
TD.PF.B FixedReset -1.53 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-06
Maturity Price : 22.77
Evaluated at bid price : 23.86
Bid-YTW : 3.54 %
MFC.PR.L FixedReset -1.24 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.01
Bid-YTW : 4.65 %
IFC.PR.A FixedReset -1.22 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.25
Bid-YTW : 5.90 %
TD.PF.C FixedReset -1.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-06
Maturity Price : 22.71
Evaluated at bid price : 23.81
Bid-YTW : 3.53 %
TRP.PR.C FixedReset -1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-06
Maturity Price : 17.12
Evaluated at bid price : 17.12
Bid-YTW : 3.92 %
BAM.PF.A FixedReset -1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-06
Maturity Price : 22.88
Evaluated at bid price : 23.92
Bid-YTW : 4.23 %
VNR.PR.A FixedReset -1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-06
Maturity Price : 23.07
Evaluated at bid price : 24.00
Bid-YTW : 4.08 %
HSE.PR.E FixedReset 1.03 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-03-31
Maturity Price : 25.00
Evaluated at bid price : 25.62
Bid-YTW : 4.11 %
FTS.PR.J Perpetual-Discount 1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-06
Maturity Price : 24.08
Evaluated at bid price : 24.50
Bid-YTW : 4.91 %
BAM.PR.K Floater 1.31 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-06
Maturity Price : 15.50
Evaluated at bid price : 15.50
Bid-YTW : 3.24 %
MFC.PR.F FixedReset 1.33 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.00
Bid-YTW : 6.10 %
ENB.PR.B FixedReset 1.45 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-06
Maturity Price : 19.56
Evaluated at bid price : 19.56
Bid-YTW : 4.60 %
ENB.PF.G FixedReset 1.49 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-06
Maturity Price : 21.92
Evaluated at bid price : 22.44
Bid-YTW : 4.42 %
CU.PR.E Perpetual-Discount 1.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-06
Maturity Price : 24.31
Evaluated at bid price : 24.77
Bid-YTW : 4.93 %
SLF.PR.H FixedReset 1.81 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.50
Bid-YTW : 4.71 %
Volume Highlights
Issue Index Shares
Traded
Notes
RY.PR.Z FixedReset 86,137 RBC crossed 69,000 at 24.10.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-06
Maturity Price : 22.93
Evaluated at bid price : 24.18
Bid-YTW : 3.45 %
TD.PF.C FixedReset 81,580 RBC sold 15,700 to TD at 23.82, then crossed 44,200 at 23.80.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-06
Maturity Price : 22.71
Evaluated at bid price : 23.81
Bid-YTW : 3.53 %
RY.PR.J FixedReset 77,339 RBC crossed 46,000 at 24.89.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-06
Maturity Price : 23.11
Evaluated at bid price : 24.86
Bid-YTW : 3.66 %
NA.PR.S FixedReset 55,180 RBC crossed 43,100 at 24.60.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-06
Maturity Price : 23.10
Evaluated at bid price : 24.60
Bid-YTW : 3.55 %
CM.PR.Q FixedReset 46,600 RBC crossed 42,500 at 24.85.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-06
Maturity Price : 23.10
Evaluated at bid price : 24.86
Bid-YTW : 3.74 %
GWO.PR.R Deemed-Retractible 43,388 Scotia bought 10,000 from National at 24.90.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.93
Bid-YTW : 4.92 %
There were 30 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
CIU.PR.C FixedReset Quote: 15.90 – 17.49
Spot Rate : 1.5900
Average : 1.2387

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-06
Maturity Price : 15.90
Evaluated at bid price : 15.90
Bid-YTW : 3.94 %

BNS.PR.Y FixedReset Quote: 22.69 – 23.25
Spot Rate : 0.5600
Average : 0.3622

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.69
Bid-YTW : 3.44 %

BAM.PF.E FixedReset Quote: 22.72 – 23.20
Spot Rate : 0.4800
Average : 0.3082

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-06
Maturity Price : 22.12
Evaluated at bid price : 22.72
Bid-YTW : 4.21 %

TD.PF.B FixedReset Quote: 23.86 – 24.25
Spot Rate : 0.3900
Average : 0.2414

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-06
Maturity Price : 22.77
Evaluated at bid price : 23.86
Bid-YTW : 3.54 %

BAM.PF.F FixedReset Quote: 24.51 – 24.85
Spot Rate : 0.3400
Average : 0.2019

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-06
Maturity Price : 23.03
Evaluated at bid price : 24.51
Bid-YTW : 4.09 %

MFC.PR.N FixedReset Quote: 23.45 – 23.75
Spot Rate : 0.3000
Average : 0.1993

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.45
Bid-YTW : 4.48 %

FTS.PR.H to Reset At 2.50%; Company Management Uncommunicative

May 6th, 2015

As I noted on May 4:

Fortis still hasn’t announced a reset rate for FTS.PR.H yet, despite the fact that it must have been calculated:

“Fixed Rate Calculation Date” means, for any Subsequent Fixed Rate Period, the 30th day prior to the first day of such Subsequent Fixed Rate Period.

“Subsequent Fixed Rate Period” means, for the initial Subsequent Fixed Rate Period, the period commencing on June 1, 2015 to, but excluding, June 1, 2020 and, for each succeeding Subsequent Fixed Rate Period, the period commencing on the first day of June immediately following the end of the immediately preceding Subsequent Fixed Rate Period to, but excluding, June 1 in the fifth year thereafter.

The Annual Fixed Dividend Rate applicable to a Subsequent Fixed Rate Period will be determined by the Corporation on the Fixed Rate Calculation Date. Such determination will, in the absence of manifest error, be final and binding upon the Corporation and upon all holders of the Series H First Preference Shares. The Corporation will, on the Fixed Rate Calculation Date, give written notice of the Annual Fixed Dividend Rate for the ensuing Subsequent Fixed Rate Period to the registered holders of the then outstanding Series H First Preference Shares.

I assume this figure will be released tomorrow morning:

Fortis Inc. (“Fortis” or the “Corporation”) (TSX:FTS) will release its first quarter 2015 results on Tuesday, May 5, 2015. A teleconference and webcast will be held the same day at 10:00 a.m. (Eastern). Barry Perry, President and Chief Executive Officer, Fortis, and Karl Smith, Executive Vice President, Chief Financial Officer, Fortis, will discuss the Corporation’s first quarter 2015 results.

Analysts, members of the media and other interested parties in North America are invited to participate by calling 1.877.223.4471. International participants may participate by calling 647.788.4922. Please dial in 10 minutes prior to the start of the call. No pass code is required.

Well, nothing was announced with the 15Q1 results and the company has yet to respond to two separate eMails I’ve sent, from which I conclude that Fortis management is arrogant shit.

However, as Assiduous Reader FletcherLynn points out in a comment, they have announced third quarter dividends:

$0.15625 per share on the First Preference Shares, Series “H” of the Corporation, payable on 1 September 2015 to the Shareholders of Record at the close of business on 19 August 2015, provided, for greater certainty, that if no such Series “H” shares are outstanding on such date as a result of the exercise by Shareholders of their right to convert Series “H” shares into Cumulative Redeemable Floating Rate First Preference Shares, Series “I” of the Corporation effective 1 June 2015 (the “Conversion Right”), no such dividend shall be payable.

5.$0.13125 per share on the First Preference Shares, Series “I” of the Corporation, payable on 1 September 2015 to the Shareholders of Record at the close of business on 19 August 2015, provided, for greater certainty, that if no such Series “I” shares are issued on 1 June 2015 pursuant to the Conversion Right, no such dividend shall be payable.

So $0.15625 per quarter for FTS.PR.H is $0.625 p.a., is 2.50% of par value which, given that FTS.PR.H resets at +145, as announced in January, 2010, means that GOC-5 must have been 1.05% on the Fixed Rate Calculation Date, which was 30 days prior to June 1, or May 2, which was a Saturday, which means that May 1 must have been used, for which I used 1.04% as the closing value for GOC-5.

In addition, the $0.13125 dividend for FTS.PR.I is $0.525 p.a., is 2.10% p.a., implying a 3-Month bill yield of 0.65%, which is reasonably close to the 0.64% I used on May 1 for the closing bill yield.

It will be noted that 2.50% on FTS.PR.H represents a stunning 41% reduction in dividend from the original 4.25%.

Since Fortis management is completely shitty and their investor relations department under a vow of silence, there is no information publicly available regarding conversion notification deadlines, but a little bird has given me information that the CDS notification deadline (the deadline for your broker to notify the Canadian Depository for Securities (which holds all the shares) is 5pm on May 19. Note that this is the Tuesday following the Victoria Day long weekend; since the market will be closed May 18, you probably won’t have much luck calling your broker the day before. So, while every brokerage will set its own internal deadline, I suggest Friday, May 15 is probably the last day they will take your instruction; although sometimes you can have them act on a best-efforts basis on the last day provided you grovel in a sufficiently entertaining fashion.

I will post in the middle of next week with my final recommendation, but at this point I will tentatively suggest that FTS.PR.I will trade lower than FTS.PR.H and hence those who really want the former issue will (probably!) be better off executing a trade in the market (assuming reasonable transaction costs.

May 5, 2015

May 5th, 2015

After years of pretending that their resource-funded low taxes meant that they were some kind of conservatives, Albertans have finally admitted they’re actually a pack of socialists:

Albertans have chosen a new political path with the stunning election of a majority New Democratic government, ending a Progressive Conservative dynasty in power for more than four decades.

The NDP, leading in the polls for much of the campaign, becomes only the third party to govern the province since 1935. Heading a new government, Leader Rachel Notley will now have a mandate to take the province in a new direction but will also inherit tough economic challenges.

Solidarity, comrades!

Australia cut policy rates and market rates rose:

Australia cut interest rates to a fresh record low and said there are signs of improving household spending, sending the currency and bond yields higher as markets bet policy makers won’t ease further.

The central bank lowered the key rate to 2 percent from 2.25 percent Tuesday, as predicted by traders and economists. Governor Glenn Stevens said in an accompanying statement “the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand.”

While weaker business investment and subdued spending by the government is weighing on the economy, encouraging the RBA to cut, there are signs that low borrowing costs are starting to spur stronger demand from households. Stevens cited a better jobs market and gave no indication the central bank was considering a further easing.

But bonds fell everywhere:

Treasuries fell with European bonds as oil’s rally above $60 a barrel added to signs of incipient inflation, while concern rose that Greece won’t be able to resolve its debt crisis. U.S. stocks tumbled the most in more than a month amid a retreat in global equities.

Yields on 10-year Treasury notes rose four basis points to 2.19 percent by 5 p.m. in New York, extending an eight-week high as U.S. crude jumped 2.5 percent to $60.40 a barrel. German bonds resumed losses, while Spanish debt tumbled with Greek stocks. The Standard & Poor’s 500 Index lost 1.2 percent, the steepest drop since March 25. European equities slid to the lowest level since March 10. Copper entered a bull market.

The exodus from sovereign-debt markets is accelerating as investors question the sustainability of rallies that pushed yields to record lows. Data Tuesday showed U.S. services growth accelerated more than forecast last month as the Federal Reserve considers raising interest rates. Crude traded in New York topped $60 for the first time this year on speculation the biggest supply glut in 85 years will ease.

Ten-year Treasury yields have increased 28 basis points, or 0.28 percentage point, since April 24 and earlier on Tuesday touched the highest level since March 6. German 10-year yields rose six basis points to 0.52 percent, for a seventh straight gain to the highest level since January. Spain’s 10-year rate jumped the most since June 2013.

There are rumblings of an increase in inflation targets:

A quarter of a century since New Zealand opened the era of inflation targeting, policy makers from the U.S., euro area, U.K. and Japan are all undershooting their consumer-price goals. Of the Group of Seven, only Canada is currently meeting its mandate.

Rather than lowering their sights to make things easier, the misses are fanning calls for targets to be increased from the 2 percent most aim for to perhaps as high as 4 percent.

While a similar idea was pitched five years ago by International Monetary Fund economists led by Olivier Blanchard, and endorsed by Nobel laureate Paul Krugman, this time around it may be the central-banking community itself proposing a rethink.

Former Federal Reserve Chair Ben S. Bernanke last month suggested he would be open to an increase in the U.S. Federal Reserve’s 2 percent goal, saying there is nothing “magical” about that number.

Fed Bank of Boston President Eric Rosengren said the same month it could be the case “inflation targets have been set too low.” His colleague from San Francisco, John Williams, told the New York Times that if the future is one of weaker growth because of demographics and productivity then it’s worth asking “is the 2 percent inflation goal sufficiently high in that kind of world?”

But if they can’t hit 2 percent, why lift the targets?

Doing so may ignite current inflation expectations, lowering so-called real interest rates and giving economic growth an extra spur, according to Jeremy Lawson, chief economist at Standard Life Investments Ltd.

And today’s drone news is about privacy:

Conflict is on the rise. A New Jersey man last year shot down a drone flying over his neighborhood. Last June, a woman in Connecticut was arrested after she was accused of assaulting a young man flying a helicopter drone over a public beach.

In the past two years, at least seven states have outlawed the use of drones to violate privacy, according to the National Conference of State Legislatures. California is considering a bill that would expand trespassing laws to include piloting a drone within 350 feet above private property without permission.

States already protect citizens against Peeping Toms regardless of the technology involved, said Brendan Schulman, an attorney who specializes in drones at Kramer Levin Naftalis and Frankel in New York.

“Many of these state law proposals are an overreaction, because existing state privacy laws already cover the types of misconduct that people are most concerned about,” he said. “It shouldn’t matter if you use a tripod or a zoom lens or a hidden camera placed in a tree. If you’re invading someone’s privacy, it’s the misconduct that should be illegal, and not the technology.”

PrefBlog’s “Things That Make You Go ‘Hmmm'” department presents, for your delectation and amusement, charts of the TXPL FixedReset index and of ZPR, the ETF based on that index, for today:

ZPR
ZPR_150505
Click for Big
TXPL
TXPL_150505
Click for Big

So it looks like there was mild weakness in TXPL commencing at about 1pm, which had no effect on ZPR until about 3pm, when ZPR started collapsing, which in turn led to a rapid collapse just before the bell in TXPL. ZPR had volume for the day of 895,012 which, by standards of the past month, is above average but not spectacular. Total returns for the day for the two measures were roughly equal. It would be most interesting to learn just what is going on; if the liquidity pundits are correct – and I think they are – we may see more of this type of loose-linkage-fast-collapse behaviour in the future, should a general rise in bond yields become disorderly.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 29bp, FixedResets down 47bp and DeemedRetractibles gaining 6bp. ENB FixedResets dominate the bad part of the Performance Highlights table. Volume was well above average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

impVol_TRP_150505
Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.20 to be $1.15 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $0.91 cheap at its bid price of 25.01.

impVol_MFC_150505
Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 23.30 to be $0.51 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.34 to be $0.58 cheap.

impVol_BAM_150505
Click for Big

The cheapest issue relative to its peers is BAM.PF.R, resetting at +230bp on 2016-6-30, bid at 20.05 to be $0.71 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 23.12 and appears to be $0.82 rich.

impVol_FTS_150505
Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.60, looks $0.78 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 22.02 and is $0.52 rich.

pairs_FR_150505A
Click for Big

Investment-grade pairs now predict an average over the next five years of about 0.30%, but TRP.PR.A / TRP.PR.F is an outlier at -0.69%. The DC.PR.B / DC.PR.D pair retains its customary outlier status, with a breakeven rate of -0.78%, but has now managed to edge its way into the graph area while the new data point for BRF.PR.A / BRF.PR.B is at -1.22% and BRF.PR.B lost its virginity with a whopping 600 shares traded.

pairs_FF_150505
Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

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 1.2035 % 2,325.8
FixedFloater 0.00 % 0.00 % 0 0.00 0 1.2035 % 4,066.6
Floater 3.12 % 3.21 % 53,444 19.19 4 1.2035 % 2,472.5
OpRet 4.42 % -1.08 % 36,619 0.16 2 -0.0196 % 2,767.0
SplitShare 4.56 % 4.77 % 67,067 3.36 3 0.4006 % 3,235.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0196 % 2,530.1
Perpetual-Premium 5.45 % 1.35 % 68,942 0.08 18 -0.0523 % 2,521.2
Perpetual-Discount 5.05 % 5.00 % 115,691 15.45 15 -0.2869 % 2,782.1
FixedReset 4.42 % 3.90 % 272,866 16.19 86 -0.4716 % 2,401.9
Deemed-Retractible 4.92 % 3.19 % 112,578 0.30 36 0.0565 % 2,649.9
FloatingReset 2.61 % 2.99 % 68,831 6.20 7 0.0367 % 2,321.5
Performance Highlights
Issue Index Change Notes
ENB.PR.B FixedReset -4.79 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 19.28
Evaluated at bid price : 19.28
Bid-YTW : 4.67 %
BAM.PR.T FixedReset -2.67 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 20.39
Evaluated at bid price : 20.39
Bid-YTW : 4.34 %
FTS.PR.J Perpetual-Discount -2.65 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 23.83
Evaluated at bid price : 24.24
Bid-YTW : 4.96 %
BAM.PR.X FixedReset -2.65 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 18.03
Evaluated at bid price : 18.03
Bid-YTW : 4.31 %
ENB.PR.F FixedReset -2.37 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 20.20
Evaluated at bid price : 20.20
Bid-YTW : 4.61 %
ENB.PR.D FixedReset -2.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 19.92
Evaluated at bid price : 19.92
Bid-YTW : 4.51 %
ENB.PF.G FixedReset -1.86 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 21.70
Evaluated at bid price : 22.11
Bid-YTW : 4.50 %
BAM.PR.R FixedReset -1.86 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 20.05
Evaluated at bid price : 20.05
Bid-YTW : 4.41 %
IFC.PR.C FixedReset -1.78 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.21
Bid-YTW : 4.28 %
ENB.PR.J FixedReset -1.76 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 21.55
Evaluated at bid price : 21.81
Bid-YTW : 4.41 %
ENB.PF.E FixedReset -1.65 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 21.63
Evaluated at bid price : 21.99
Bid-YTW : 4.50 %
ENB.PF.C FixedReset -1.57 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 21.60
Evaluated at bid price : 21.93
Bid-YTW : 4.49 %
ENB.PR.T FixedReset -1.40 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 20.43
Evaluated at bid price : 20.43
Bid-YTW : 4.57 %
BNS.PR.Y FixedReset -1.30 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.82
Bid-YTW : 3.35 %
NA.PR.S FixedReset -1.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 23.07
Evaluated at bid price : 24.52
Bid-YTW : 3.57 %
ENB.PR.N FixedReset -1.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 21.15
Evaluated at bid price : 21.15
Bid-YTW : 4.55 %
ENB.PR.Y FixedReset -1.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 19.83
Evaluated at bid price : 19.83
Bid-YTW : 4.60 %
TRP.PR.D FixedReset -1.18 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 22.64
Evaluated at bid price : 23.54
Bid-YTW : 3.74 %
ENB.PR.P FixedReset -1.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 20.66
Evaluated at bid price : 20.66
Bid-YTW : 4.51 %
CU.PR.E Perpetual-Discount -1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 23.98
Evaluated at bid price : 24.40
Bid-YTW : 5.00 %
MFC.PR.F FixedReset -1.06 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.75
Bid-YTW : 6.26 %
BAM.PR.K Floater 1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 15.30
Evaluated at bid price : 15.30
Bid-YTW : 3.28 %
CIU.PR.C FixedReset 1.40 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 17.00
Evaluated at bid price : 17.00
Bid-YTW : 3.68 %
BAM.PR.C Floater 1.79 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 15.39
Evaluated at bid price : 15.39
Bid-YTW : 3.26 %
HSE.PR.A FixedReset 2.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 17.17
Evaluated at bid price : 17.17
Bid-YTW : 4.24 %
BAM.PR.B Floater 2.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 15.65
Evaluated at bid price : 15.65
Bid-YTW : 3.21 %
Volume Highlights
Issue Index Shares
Traded
Notes
TD.PF.C FixedReset 63,365 TD bought 10,000 from RBC at 24.09, then crossed 20,000 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 22.82
Evaluated at bid price : 24.07
Bid-YTW : 3.48 %
ENB.PR.D FixedReset 63,180 TD crossed 40,000 at 20.00.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 19.92
Evaluated at bid price : 19.92
Bid-YTW : 4.51 %
TRP.PR.G FixedReset 50,330 RBC crossed 17,500 at 25.20.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 23.13
Evaluated at bid price : 25.01
Bid-YTW : 3.90 %
RY.PR.H FixedReset 47,655 TD crossed 25,000 at 24.22.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 22.89
Evaluated at bid price : 24.15
Bid-YTW : 3.48 %
CM.PR.Q FixedReset 46,260 Scotia crossed 40,000 at 24.95.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 23.02
Evaluated at bid price : 24.65
Bid-YTW : 3.78 %
PWF.PR.P FixedReset 45,955 Scotia bought 21,300 from RBC at 18.60.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 18.70
Evaluated at bid price : 18.70
Bid-YTW : 3.70 %
There were 41 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
ENB.PR.B FixedReset Quote: 19.28 – 19.93
Spot Rate : 0.6500
Average : 0.3703

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 19.28
Evaluated at bid price : 19.28
Bid-YTW : 4.67 %

FTS.PR.J Perpetual-Discount Quote: 24.24 – 24.90
Spot Rate : 0.6600
Average : 0.4218

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 23.83
Evaluated at bid price : 24.24
Bid-YTW : 4.96 %

BMO.PR.T FixedReset Quote: 24.05 – 24.60
Spot Rate : 0.5500
Average : 0.3169

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 22.85
Evaluated at bid price : 24.05
Bid-YTW : 3.48 %

NA.PR.S FixedReset Quote: 24.52 – 25.00
Spot Rate : 0.4800
Average : 0.2874

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 23.07
Evaluated at bid price : 24.52
Bid-YTW : 3.57 %

IFC.PR.C FixedReset Quote: 24.21 – 24.69
Spot Rate : 0.4800
Average : 0.3131

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.21
Bid-YTW : 4.28 %

CU.PR.E Perpetual-Discount Quote: 24.40 – 24.89
Spot Rate : 0.4900
Average : 0.3266

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-05
Maturity Price : 23.98
Evaluated at bid price : 24.40
Bid-YTW : 5.00 %

May 4, 2015

May 4th, 2015

Canadian banks do not own hedge funds, so the TMX announced reductions in maker-taker fees:

TMX Group Ltd., the owner of the Toronto Stock Exchange and other Canadian markets, said Monday that it will cut rebates it pays traders who provide liquidity by an average of 31 percent and trading fees by 26 percent on average.

The rebate-and-fee system — called maker-taker and also deployed by American exchanges — is blamed by critics for skewing incentives for brokers and encouraging needless trading meant to simply collect the rebates. While the New York Stock Exchange’s owner last year talked about changing the system in the U.S., TMX’s statement Monday included concrete plans that are poised to be implemented.

“The maker-taker model has been controversial for a long time,” Kevan Cowan, president of TSX Markets and group head of equities, said in a phone interview from Toronto. “It’s closely linked to issues around electronic trading. We felt, based on primarily customer feedback but also what’s going on in the regulatory and competitive landscape, that now was a good time for us to take a leadership position.”

It will be noted that the banks clear-cut the competitive landscape by buying the Toronto Exchange. This move was permitted by the regulators on the grounds that the banks would pay the regulators extra money.

Treasuries took another hit today:

The 30-year bond yield rose five basis points, or 0.05 percentage point, to 2.88 percent at 5 p.m. New York time. The price of the 2.5 percent security maturing in February 2045 fell 30/32, or $9.38 per $1,000 face amount, to 92 1/2, according to Bloomberg Bond Trader prices. The yield reached the highest level since Dec. 24.

Benchmark 10-year yields rose 21 basis points last week, nearly matching the 22 basis point move in German bunds of comparable maturity, the most since January 2013.

The gap between yields on Treasuries maturing in five- and 30-years, known as the yield curve, widened to 1.37 percentage points, the most since December.

The 5-30 spread is – or at least should be! – important for FixedReset pricing. Steepening should(!) imply poor performance by FixedResets.

I found this piece on youthful environment interesting:

Male children who are raised in below-median income families in Baltimore earn 1.4 percent less in adult family income for each year that they’re exposed to the neighborhood. That means a man who spent his entire childhood — 20 years — in Baltimore would earn about 28 percent less relative to the national average as an adult.

That gives Baltimore the worst ranking among the 100 largest counties in the U.S. While a penalty exists for girls, too, it’s less substantial, amounting to 0.3 percent in lost earnings per childhood year.

There are pockets across the U.S. “which seem to produce especially poor outcomes for boys,” Harvard economists Raj Chetty and Nathaniel Hendren wrote in a new study. “Areas with high degrees of segregation and sprawl generate particularly negative outcomes for boys relative to girls.”

The abstract of the paper, The Impacts of Neighborhoods on Intergenerational Mobility: Childhood Exposure Effects and County-Level Estimates, by Raj Chetty and Nathaniel Hendren, reads:

We characterize the effects of neighborhoods on children’s earnings and other outcomes in adulthood by studying more than five million families who move across counties in the U.S. Our analysis consists of two parts. In the first part, we present quasi-experimental evidence that neighborhoods affect intergenerational mobility through childhood exposure effects. In particular, the outcomes of children whose families move to a better neighborhood – as measured by the outcomes of children already living there – improve linearly in proportion to the time they spend growing up in that area. We distinguish the causal effects of neighborhoods from confounding factors by comparing the outcomes of siblings within families, studying moves triggered by displacement shocks, and exploiting sharp variation in predicted place effects across birth cohorts, genders, and quantiles. We also document analogous childhood exposure effects for college attendance, teenage birth rates, and marriage rates. In the second part of the paper, we identify the causal effect of growing up in every county in the U.S. by estimating a fixed effects model identified from families who move across counties with children of different ages. We use these estimates to decompose observed intergenerational mobility into a causal and sorting component in each county. For children growing up in families at the 25th percentile of the income distribution, each year of childhood exposure to a one standard deviation (SD) better county increases income in adulthood by 0.5%. Hence, growing up in a one SD better county from birth increases a child’s income by approximately 10%. Low-income children are most likely to succeed in counties that have less concentrated poverty, less income inequality, better schools, a larger share of two-parent families, and lower crime rates. Boys’ outcomes vary more across areas than girls, and boys have especially poor outcomes in highly-segregated areas. In urban areas, better areas have higher house prices, but our analysis uncovers significant variation in neighborhood quality even conditional on prices.

Fortis still hasn’t announced a reset rate for FTS.PR.H yet, despite the fact that it must have been calculated:

“Fixed Rate Calculation Date” means, for any Subsequent Fixed Rate Period, the 30th day prior to the first day of such Subsequent Fixed Rate Period.

“Subsequent Fixed Rate Period” means, for the initial Subsequent Fixed Rate Period, the period commencing on June 1, 2015 to, but excluding, June 1, 2020 and, for each succeeding Subsequent Fixed Rate Period, the period commencing on the first day of June immediately following the end of the immediately preceding Subsequent Fixed Rate Period to, but excluding, June 1 in the fifth year thereafter.

The Annual Fixed Dividend Rate applicable to a Subsequent Fixed Rate Period will be determined by the Corporation on the Fixed Rate Calculation Date. Such determination will, in the absence of manifest error, be final and binding upon the Corporation and upon all holders of the Series H First Preference Shares. The Corporation will, on the Fixed Rate Calculation Date, give written notice of the Annual Fixed Dividend Rate for the ensuing Subsequent Fixed Rate Period to the registered holders of the then outstanding Series H First Preference Shares.

I assume this figure will be released tomorrow morning:

Fortis Inc. (“Fortis” or the “Corporation”) (TSX:FTS) will release its first quarter 2015 results on Tuesday, May 5, 2015. A teleconference and webcast will be held the same day at 10:00 a.m. (Eastern). Barry Perry, President and Chief Executive Officer, Fortis, and Karl Smith, Executive Vice President, Chief Financial Officer, Fortis, will discuss the Corporation’s first quarter 2015 results.

Analysts, members of the media and other interested parties in North America are invited to participate by calling 1.877.223.4471. International participants may participate by calling 647.788.4922. Please dial in 10 minutes prior to the start of the call. No pass code is required.

It was a positive day for the Canadian preferred share market, with PerpetualDiscounts up 17bp, FixedResets winning 17bp and DeemedRetractibles gaining 1bp. The Performance Highlights table calmed down a bit, but is still dominated by winning FixedResets. Volume was below average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

impVol_TRP_150504
Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.32 to be $1.21 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $0.96 cheap at its bid price of 25.00.

impVol_MFC_150504
Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 23.31 to be $0.40 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.48 to be $0.50 cheap.

impVol_BAM_150504
Click for Big

The cheapest issue relative to its peers is BAM.PF.R, resetting at +230bp on 2016-6-30, bid at 20.43 to be $0.60 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 23.16 and appears to be $0.61 rich.

impVol_FTS_150504
Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.75, looks $0.65 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 22.03 and is $0.52 rich.

pairs_FR_150504
Click for Big

Investment-grade pairs now predict an average over the next five years of about 0.25%, but TRP.PR.A / TRP.PR.F is an outlier at -0.62%. The DC.PR.B / DC.PR.D pair retains its customary outlier status, with a breakeven rate of -1.39%, while the new data point for BRF.PR.A / BRF.PR.B is at -1.22% … but there has still been no trading yet for BRF.PR.B.

pairs_FF_150504
Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

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 0.0792 % 2,298.2
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.0792 % 4,018.3
Floater 3.16 % 3.28 % 53,773 19.02 4 0.0792 % 2,443.1
OpRet 4.42 % -1.06 % 38,133 0.16 2 0.0786 % 2,767.5
SplitShare 4.57 % 4.90 % 68,087 3.37 3 -0.0134 % 3,222.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0786 % 2,530.6
Perpetual-Premium 5.45 % 0.70 % 68,360 0.08 18 0.0959 % 2,522.5
Perpetual-Discount 5.02 % 4.98 % 114,596 15.44 15 0.1499 % 2,790.1
FixedReset 4.40 % 3.86 % 273,131 16.35 86 0.1686 % 2,413.2
Deemed-Retractible 4.93 % 2.98 % 113,370 0.30 36 0.0111 % 2,648.4
FloatingReset 2.61 % 2.99 % 69,505 6.20 7 0.0184 % 2,320.7
Performance Highlights
Issue Index Change Notes
IFC.PR.A FixedReset -1.52 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.68
Bid-YTW : 5.63 %
MFC.PR.M FixedReset -1.46 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.65
Bid-YTW : 4.45 %
BAM.PR.X FixedReset -1.23 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-04
Maturity Price : 18.52
Evaluated at bid price : 18.52
Bid-YTW : 4.19 %
FTS.PR.H FixedReset 1.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-04
Maturity Price : 16.75
Evaluated at bid price : 16.75
Bid-YTW : 3.84 %
PWF.PR.P FixedReset 1.35 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-04
Maturity Price : 18.75
Evaluated at bid price : 18.75
Bid-YTW : 3.69 %
MFC.PR.K FixedReset 1.38 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.44
Bid-YTW : 4.36 %
GWO.PR.N FixedReset 1.44 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.36
Bid-YTW : 6.19 %
ENB.PR.F FixedReset 1.92 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-04
Maturity Price : 20.69
Evaluated at bid price : 20.69
Bid-YTW : 4.49 %
PWF.PR.A Floater 2.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-04
Maturity Price : 17.60
Evaluated at bid price : 17.60
Bid-YTW : 2.83 %
SLF.PR.G FixedReset 2.54 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.20
Bid-YTW : 6.33 %
CIU.PR.C FixedReset 3.47 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-04
Maturity Price : 17.00
Evaluated at bid price : 17.00
Bid-YTW : 3.76 %
Volume Highlights
Issue Index Shares
Traded
Notes
TD.PF.E FixedReset 52,830 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-10-31
Maturity Price : 25.00
Evaluated at bid price : 25.05
Bid-YTW : 3.69 %
GWO.PR.R Deemed-Retractible 37,100 TD crossed 30,000 at 25.03.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.00
Bid-YTW : 4.88 %
SLF.PR.H FixedReset 36,246 RBC crossed 30,000 at 22.07.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.25
Bid-YTW : 4.84 %
CM.PR.Q FixedReset 31,504 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-04
Maturity Price : 23.08
Evaluated at bid price : 24.82
Bid-YTW : 3.75 %
TD.PF.B FixedReset 30,413 TD crossed 25,000 at 24.28.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-04
Maturity Price : 22.95
Evaluated at bid price : 24.28
Bid-YTW : 3.46 %
TRP.PR.G FixedReset 29,900 RBC crossed 17,500 at 25.10.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-11-30
Maturity Price : 25.00
Evaluated at bid price : 25.00
Bid-YTW : 3.76 %
There were 26 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
VNR.PR.A FixedReset Quote: 24.13 – 24.83
Spot Rate : 0.7000
Average : 0.4552

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-04
Maturity Price : 23.13
Evaluated at bid price : 24.13
Bid-YTW : 4.05 %

IFC.PR.A FixedReset Quote: 20.68 – 21.26
Spot Rate : 0.5800
Average : 0.4049

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.68
Bid-YTW : 5.63 %

RY.PR.H FixedReset Quote: 24.08 – 24.45
Spot Rate : 0.3700
Average : 0.2201

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-04
Maturity Price : 22.86
Evaluated at bid price : 24.08
Bid-YTW : 3.49 %

BAM.PR.Z FixedReset Quote: 24.41 – 24.84
Spot Rate : 0.4300
Average : 0.3154

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-04
Maturity Price : 23.21
Evaluated at bid price : 24.41
Bid-YTW : 4.21 %

SLF.PR.G FixedReset Quote: 18.20 – 18.50
Spot Rate : 0.3000
Average : 0.1925

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.20
Bid-YTW : 6.33 %

PWF.PR.T FixedReset Quote: 24.86 – 25.25
Spot Rate : 0.3900
Average : 0.2836

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-04
Maturity Price : 23.23
Evaluated at bid price : 24.86
Bid-YTW : 3.50 %

MAPF Performance: April 2015

May 3rd, 2015

The fund strongly broke even with the index in April, a month marked by a January-style crash in the first half and an impressive rally in the second half.

ZPR, is an ETF comprised of FixedResets and Floating Rate issues and a very high proportion of junk issues, returned +%, +% and +% over the past one-, three- and twelve-month periods, respectively (according to the fund’s data), versus returns for the TXPL index of -0.55%, -1.63% and -8.33% respectively. The fund has been able to attract assets of about $1,111-million since inception in November 2012; AUM increased by $15-million in April; given an index return of -0.55% a decrease of about $6-million was expected, so in March 2015 the fund was able to attract assets. I feel that the flows into and out of this fund are very important in determining the performance of its constituents.

TXPR had returns over one-, three- and twelve-months of -0.36%, -0.66% and -3.19% respectively with CPD performance within expectations.

Returns for the HIMIPref™ investment grade sub-indices for the month were as follows:

HIMIPref™ Indices
Performance to April, 2015
Sub-Index 1-Month 3-month
Ratchet N/A N/A
FixFloat N/A N/A
Floater -3.99% +3.57%
OpRet -0.08% +0.54%
SplitShare +0.43% +1.51%
Interest N/A N/A
PerpetualPremium -0.27% +0.30%
PerpetualDiscount -1.78% +0.81%
FixedReset -0.53% +0.02%
DeemedRetractible -0.46% +0.37%
FloatingReset -1.55% +1.86%

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close April 30, 2015, was $9.9359.

Returns to April 30, 2015
Period MAPF BMO-CM “50” Index TXPR
Total Return
CPD – according to Blackrock
One Month -0.21% -0.21% -0.36% N/A
Three Months +0.98% -0.46% -0.66% N/A
One Year -0.11% -3.79% -3.19% -3.46%
Two Years (annualized) +0.64% -1.37% -1.56% N/A
Three Years (annualized) +3.38% +0.60% +0.67% +0.21%
Four Years (annualized) +3.53% +2.06% +1.80% N/A
Five Years (annualized) +7.28% +4.67% +4.11% +3.55%
Six Years (annualized) +10.53% +6.55% +5.34%  
Seven Years (annualized) +11.71% +4.27% +3.35%  
Eight Years (annualized) +10.23% +2.98%    
Nine Years (annualized) +9.83% +3.11%    
Ten Years (annualized) +9.48% +3.14%    
Eleven Years (annualized) +9.51% +3.38%    
Twelve Years (annualized) +10.74% +3.62%    
Thirteen Years (annualized) +10.03% +3.80%    
Fourteen Years (annualized) +10.46% +3.59%    
MAPF returns assume reinvestment of distributions, and are shown after expenses but before fees.
CPD Returns are for the NAV and are after all fees and expenses.
Figures for National Bank Preferred Equity Income Fund (formerly Omega Preferred Equity) (which are after all fees and expenses) for 1-, 3- and 12-months are -0.55%, -0.82% and -1.17%, respectively, according to Morningstar after all fees & expenses. Three year performance is +1.64%; five year is +4.71%
Figures for Jov Leon Frazer Preferred Equity Fund Class I Units (which are after all fees and expenses) for 1-, 3- and 12-months are +%, -% and -% respectively, according to Morningstar. Three Year performance is +%; five-year is +%
Figures for Manulife Preferred Income Class Adv [into which was merged Manulife Preferred Income Fund (formerly AIC Preferred Income Fund)] (which are after all fees and expenses) for 1-, 3- and 12-months are -0.55%, -1.11% & N/A, respectively.
Figures for Horizons AlphaPro Preferred Share ETF (which are after all fees and expenses) for 1-, 3- and 12-months are -0.35%, -0.68% & -2.17%, respectively. Three year performance is +1.45%
Figures for National Bank Preferred Equity Fund (formerly Altamira Preferred Equity Fund) are -0.48%, -0.95% and -3.49% for one-, three- and twelve months, respectively.
The figure for BMO S&P/TSX Laddered Preferred Share Index ETF is -0.41%, -1.55% and -8.72% for one-, three- and twelve-months, respectively. Two year performance is -4.92%.
Figures for NexGen Canadian Preferred Share Tax Managed Fund (Dividend Tax Credit Class, the best performing) are +0.2%, +0.9% and +4.8% for one-, three- and twelve-months, respectively.
Figures for BMO Preferred Share Fund are -4.20% and -1.89% for the past three- and twelve-months, respectively.
Figures for PowerShares Canadian Preferred Share Index Class, Series Fare -0.81%, -2.41% and -4.91% for the past one, three and twelve months, respectively. The three- and five-year figures are -1.16% and +2.45%, respectively.

MAPF returns assume reinvestment of dividends, and are shown after expenses but before fees. Past performance is not a guarantee of future performance. You can lose money investing in Malachite Aggressive Preferred Fund or any other fund. For more information, see the fund’s main page. The fund is available either directly from Hymas Investment Management or through a brokerage account at Odlum Brown Limited.

A problem that has bedevilled the market over the past four years has been the OSFI decision not to grandfather Straight Perpetuals as Tier 1 bank capital, and their continued foot-dragging regarding a decision on insurer Straight Perpetuals has segmented the market to the point where trading has become much more difficult. Until the market became so grossly segmented, there were many comparables for any given issue – but now banks are not available to swap into (because they are so expensive) and non-regulated companies are likewise deprecated (because they are not DeemedRetractibles; they should not participate in the increase in value that will follow the OSFI decision I anticipate and, in addition, are analyzed as perpetuals). The fund’s portfolio was, in effect ‘locked in’ to the low coupon DeemedRetractibles due to projected long-term gains from a future OSFI decision to the detriment of trading gains, particularly in May, 2013, when the three lowest-coupon SLF DeemedRetractibles (SLF.PR.C, SLF.PR.D and SLF.PR.E) were the worst performing DeemedRetractibles in the sub-index, and in June, 2013, when the insurance-issued DeemedRetractibles behaved like PerpetualDiscounts in a sharply negative market. Nowadays, the fund is ‘locked-in’ to the low-spread FixedResets from these companies: GWO.PR.N, MFC.PR.F, and SLF.PR.G.

In March, insurance DeemedRetractibles performed somewhat worse than bank DeemedRetractibles:

perfStraight_insBank_140430
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… but better than Unregulated Straight Perpetuals.

perfStraight_insUnreg_140430
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Correlations were very poor for banks (6%; not shown), not much good for insurance (11%) but quite reasonable for unregulated issues (56%).

A lingering effect of the downdraft of 2013 has been the return of measurable Implied Volatility but given my recent updates in recent daily market reports, I will not discuss them further in this post.

Sometimes everything works … sometimes it’s 50-50 … sometimes nothing works. The fund seeks to earn incremental return by selling liquidity (that is, taking the other side of trades that other market participants are strongly motivated to execute), which can also be referred to as ‘trading noise’ – although for quite some time, noise trading has taken a distant second place to the sectoral play on insurance DeemedRetractibles; something that dismays me, particularly given that the market does not yet agree with me regarding the insurance issues! There were a lot of strongly motivated market participants during the Panic of 2007, generating a lot of noise! Unfortunately, the conditions of the Panic may never be repeated in my lifetime … but the fund will simply attempt to make trades when swaps seem profitable, without worrying about the level of monthly turnover.

There’s plenty of room for new money left in the fund. I have shown in PrefLetter that market pricing for FixedResets is very often irrational and I have lots of confidence – backed up by my bond portfolio management experience in the markets for Canadas and Treasuries, and equity trading on the NYSE & TSX – that there is enough demand for liquidity in any market to make the effort of providing it worthwhile (although the definition of “worthwhile” in terms of basis points of outperformance changes considerably from market to market!) I will continue to exert utmost efforts to outperform but it should be borne in mind that there will almost inevitably be periods of underperformance in the future.

The yields available on high quality preferred shares remain elevated, which is reflected in the current estimate of sustainable income.

Calculation of MAPF Sustainable Income Per Unit
Month NAVPU Portfolio
Average
YTW
Leverage
Divisor
Securities
Average
YTW
Capital
Gains
Multiplier
Sustainable
Income
per
current
Unit
June, 2007 9.3114 5.16% 1.03 5.01% 1.3240 0.3524
September 9.1489 5.35% 0.98 5.46% 1.3240 0.3773
December, 2007 9.0070 5.53% 0.942 5.87% 1.3240 0.3993
March, 2008 8.8512 6.17% 1.047 5.89% 1.3240 0.3938
June 8.3419 6.034% 0.952 6.338% 1.3240 $0.3993
September 8.1886 7.108% 0.969 7.335% 1.3240 $0.4537
December, 2008 8.0464 9.24% 1.008 9.166% 1.3240 $0.5571
March 2009 $8.8317 8.60% 0.995 8.802% 1.3240 $0.5872
June 10.9846 7.05% 0.999 7.057% 1.3240 $0.5855
September 12.3462 6.03% 0.998 6.042% 1.3240 $0.5634
December 2009 10.5662 5.74% 0.981 5.851% 1.1141 $0.5549
March 2010 10.2497 6.03% 0.992 6.079% 1.1141 $0.5593
June 10.5770 5.96% 0.996 5.984% 1.1141 $0.5681
September 11.3901 5.43% 0.980 5.540% 1.1141 $0.5664
December 2010 10.7659 5.37% 0.993 5.408% 1.0298 $0.5654
March, 2011 11.0560 6.00% 0.994 5.964% 1.0298 $0.6403
June 11.1194 5.87% 1.018 5.976% 1.0298 $0.6453
September 10.2709 6.10%
Note
1.001 6.106% 1.0298 $0.6090
December, 2011 10.0793 5.63%
Note
1.031 5.805% 1.0000 $0.5851
March, 2012 10.3944 5.13%
Note
0.996 5.109% 1.0000 $0.5310
June 10.2151 5.32%
Note
1.012 5.384% 1.0000 $0.5500
September 10.6703 4.61%
Note
0.997 4.624% 1.0000 $0.4934
December, 2012 10.8307 4.24% 0.989 4.287% 1.0000 $0.4643
March, 2013 10.9033 3.87% 0.996 3.886% 1.0000 $0.4237
June 10.3261 4.81% 0.998 4.80% 1.0000 $0.4957
September 10.0296 5.62% 0.996 5.643% 1.0000 $0.5660
December, 2013 9.8717 6.02% 1.008 5.972% 1.0000 $0.5895
March, 2014 10.2233 5.55% 0.998 5.561% 1.0000 $0.5685
June 10.5877 5.09% 0.998 5.100% 1.0000 $0.5395
September 10.4601 5.28% 0.997 5.296% 1.0000 $0.5540
December, 2014 10.5701 4.83% 1.009 4.787% 1.0000 $0.5060
March, 2015 9.9573 4.99% 1.001 4.985% 1.0000 $0.4964
April, 2015 9.9359 5.06% 1.000 5.060% 1.0000 $0.5028
NAVPU is shown after quarterly distributions of dividend income and annual distribution of capital gains.
Portfolio YTW includes cash (or margin borrowing), with an assumed interest rate of 0.00%
The Leverage Divisor indicates the level of cash in the account: if the portfolio is 1% in cash, the Leverage Divisor will be 0.99
Securities YTW divides “Portfolio YTW” by the “Leverage Divisor” to show the average YTW on the securities held; this assumes that the cash is invested in (or raised from) all securities held, in proportion to their holdings.
The Capital Gains Multiplier adjusts for the effects of Capital Gains Dividends. On 2009-12-31, there was a capital gains distribution of $1.989262 which is assumed for this purpose to have been reinvested at the final price of $10.5662. Thus, a holder of one unit pre-distribution would have held 1.1883 units post-distribution; the CG Multiplier reflects this to make the time-series comparable. Note that Dividend Distributions are not assumed to be reinvested.
Sustainable Income is the resultant estimate of the fund’s dividend income per current unit, before fees and expenses. Note that a “current unit” includes reinvestment of prior capital gains; a unitholder would have had the calculated sustainable income with only, say, 0.9 units in the past which, with reinvestment of capital gains, would become 1.0 current units.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company (definition refined in May, 2011). These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 (banks) or 2025-1-31 (insurers and insurance holding companies), in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, editions of PrefLetter for the rationale behind this analysis.

The same reasoning is also applied to FixedResets from these issuers, other than explicitly defined NVCC from banks.

Yields for September, 2011, to January, 2012, were calculated by imposing a cap of 10% on the yields of YLO issues held, in order to avoid their extremely high calculated yields distorting the calculation and to reflect the uncertainty in the marketplace that these yields will be realized. From February to September 2012, yields on these issues have been set to zero. All YLO issues held were sold in October 2012.

Significant positions were held in DeemedRetractible, SplitShare and NVCC non-compliant regulated FixedReset issues on April 30; all of these currently have their yields calculated with the presumption that they will be called by the issuers at par prior to 2022-1-31 (banks) or 2025-1-31 (insurers and insurance holding companies) or on a different date (SplitShares) This presents another complication in the calculation of sustainable yield, which also assumes that redemption proceeds will be reinvested at the same rate.

I will also note that the sustainable yield calculated above is not directly comparable with any yield calculation currently reported by any other preferred share fund as far as I am aware. The Sustainable Yield depends on:
i) Calculating Yield-to-Worst for each instrument and using this yield for reporting purposes;
ii) Using the contemporary value of Five-Year Canadas (set at 1.40% for the December 31 calculation and 0.88% for the March 31 calculation) to estimate dividends after reset for FixedResets. The assumption regarding the five-year Canada rate has become more important as the proportion of low-spread FixedResets in the portfolio has increased.
iii) Making the assumption that deeply discounted NVCC non-compliant issues from both banks and insurers, both Straight and FixedResets will be redeemed at par on their DeemedMaturity date as discussed above.

I no longer show calculations that assume the conversion of the entire portfolio into PerpetualDiscounts, as the fund has only a small position in these issues.

Most funds report Current Yield. For instance, ZPR reports a “Dividend Yield” of 4.5% as of August 29, 2014, but this is the Current Yield, a meaningless number. The Current Yield of MAPF was 4.89% as of August 29, but I will neither report that with any degree of prominence nor take any great pleasure in the fact that it’s a little higher than the ZPR number. It’s meaningless; to discuss it in the context of portfolio reporting is misleading.

However, BMO has taken a significant step forward in that they are no longer reporting the “Portfolio Yield” directly on their website; the information is taken from the “Enhanced Fund Profile” which is available only as a PDF link. CPD doesn’t report this metric on the CPD fact sheet or on their website. I may have one less thing to mock the fundcos about!

It should be noted that the concept of this Sustainable Income calculation was developed when the fund’s holdings were overwhelmingly PerpetualDiscounts – see, for instance, the bottom of the market in November 2008. It is easy to understand that for a PerpetualDiscount, the technique of multiplying yield by price will indeed result in the coupon – a PerpetualDiscount paying $1 annually will show a Sustainable Income of $1, regardless of whether the price is $24 or $17.

Things are not quite so neat when maturity dates and maturity prices that are different from the current price are thrown into the mix. If we take a notional Straight Perpetual paying $5 annually, the price is $100 when the yield is 5% (all this ignores option effects). As the yield increases to 6%, the price declines to 83.33; and 83.33 x 6% is the same $5. Good enough.

But a ten year bond, priced at 100 when the yield is equal to its coupon of 5%, will decline in price to 92.56; and 92.56 x 6% is 5.55; thus, the calculated Sustainable Income has increased as the price has declined as shown in the graph:


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The difference is because the bond’s yield calculation includes the amortization of the discount; therefore, so does the Sustainable Income estimate.

Different assumptions lead to different results from the calculation, but the overall positive trend is apparent. I’m very pleased with the long-term results! It will be noted that if there was no trading in the portfolio, one would expect the sustainable yield to be constant (before fees and expenses). The success of the fund’s trading is showing up in

  • the very good performance against the index
  • the long term increases in sustainable income per unit

As has been noted, the fund has maintained a credit quality equal to or better than the index; outperformance has generally been due to exploitation of trading anomalies.

Again, there are no predictions for the future! The fund will continue to trade between issues in an attempt to exploit market gaps in liquidity, in an effort to outperform the index and keep the sustainable income per unit – however calculated! – growing.

Low Spread FixedResets: April, 2015

May 3rd, 2015

As noted in MAPF Portfolio Composition: April 2015, the fund now has a large allocation to FixedResets, mostly of relatively low spread.

Many of these were largely purchased with proceeds of sales of DeemedRetractibles from the same issuer; it is interesting to look at the price trend of some of the Straight/FixedReset pairs. We’ll start with GWO.PR.N / GWO.PR.I; the fund sold the latter to buy the former at a takeout of about $1.00 in mid-June, 2014; relative prices over the past year are plotted as:

GWOPRN_GWOPRI_bidDiff_150430
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Given that the April month-end take-out was $5.69, this is clearly a trade that has not worked out very well.

In July, 2014, I reported sales of SLF.PR.D to purchase SLF.PR.G at a take-out of about $0.15:

SLFPRG_SLFPRD_bidDiff_150430
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There were similar trades in August, 2014 (from SLF.PR.C) at a take-out of $0.35. The April month-end take-out (bid price SLF.PR.D less bid price SLF.PR.G) was $6.25, so that hasn’t worked very well either.

November saw the third insurer-based sector swap, as the fund sold MFC.PR.C to buy the FixedReset MFC.PR.F at a post-dividend-adjusted take-out of about $0.85 … given a February month-end take-out of about $5.29, that’s another regrettable trade, although another piece executed in December at a take-out of $1.57 has less badly.

MFCPRF_MFCPRC_bidDiff_150430
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This trend is not restricted to the insurance sector, which I expect will become subject to NVCC rules in the relatively near future and are thus subject to the same redemption assumptions I make for DeemedRetractibles. Other pairs of interest are BAM.PR.X / BAM.PR.N:

BAMPRX_BAMPRN_bidDiff_150430
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… and FTS.PR.H / FTS.PR.J:

FTSPRH_FTSPRJ_bidDiff_150430
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… and PWF.PR.P / PWF.PR.S:

PWFPRP_PWFPRS_bidDiff_150430
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I will agree that the fund’s trades highlighted in this post may be decried as cases of monumental bad timing, but I should point out that in May, 2014, the fund was 63.9% Straight / 9.5% FixedReset while in April 2015 the fund was 10% Straight / 85% FixedReset, FloatingReset and FixedFloater (The latter figures include allocations from those usually grouped as ‘Scraps’). Given that the indices are roughly 30% Straight / 60% FixedReset & FloatingReset, it is apparent that the fund was extremely overweighted in Straights / underweighted in FixedResets in May 2014 but this situation has now reversed. HIMIPref™ analytics have been heavily favouring low-spread issues and the fund’s holdings are overwhelmingly of this type.

Summarizing the charts above in tabular form, we see:

FixedReset Straight Take-out
December 2013
Take-out
MAPF Trade
Take-out
December 2014
Take-out March 2015 Take-out
April 2015
GWO.PR.N
3.65%+130
GWO.PR.I
4.5%
($0.04) $1.00 $2.95 $5.74 $5.69
SLF.PR.G
4.35%+141
SLF.PR.D
4.45%
($1.29) $0.25 $2.16 $6.16 $6.25
MFC.PR.F
4.20%+141
MFC.PR.C
4.50%
($1.29) $0.86 $1.20 $5.46 $5.35
BAM.PR.X
4.60%+180
BAM.PR.N
4.75%
($2.06)   $0.17 $4.76 $4.18
FTS.PR.H
4.25%+145
FTS.PR.J
4.75%
$0.60   $5.68 $8.86 $8.07
PWF.PR.P
4.40%+160
PWF.PR.S
4.80%
($0.67)   $3.00 $6.43 $6.50
The ‘Take-Out’ is the bid price of the Straight less the bid price of the FixedReset; approximate execution prices are used for the “MAPF Trade” column. Bracketted figures in the ‘Take-Out’ columns indicate a ‘Pay-Up’

There was not much change from March month-end to April month-end, although the charts show some great excitement in mid-March, with spreads widening dramatically. The following chart shows the normalized total return of the HIMIPref™ FixedReset index through the month:

FR_TRIV_150501
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So why is all this happening? One should take care in explaining market movements, but it is my belief that in the latter half of 2013 we were dealing with the ‘taper tantrum’ – the market’s fears that Fed tapering and subsequent tapering would lead to massive spikes in yields; this led to a great preference for FixedResets over Straights. Now, with the economic news getting less inflationary with every news story and Europe and Japan desperately trying to reflate their sluggish economies, the market seems to think that these rate increases are still a long way off … leading to a great preference for Straights over FixedResets.

In addition, the graphs show a sharp spike in early December, during which the low-spread FixedResets were very badly hurt; I believe this to be due to a combination of tax-loss selling and a panicky response to the 29% reduction in the TRP.PR.A dividend.

And in January it just got worse with Canada yields plummeting after the Bank of Canada rate cut with speculation rife about future cuts although this slowly died away.

And in late March / early April it got worse again, with one commenter attributing at least some of the blame to the John Heinzl piece in which I pointed out the expected reduction in dividend payouts! Insofar as I am willing to guess what motivates ‘the market’, I will guess that the rally in the latter half of April is due to a feeling that the previously scheduled European deflation has been cancelled, which in turn encouraged an increase in Treasury yields which fed through to the Canadian market.

There was some good discussion about the declining phase in the comments to the January 29 market action report. I take the view that we’ve seen this show before: during the Credit Crunch, Floaters got hit extremely badly (to the point at which their fifteen year total return was negative) because (as far as I can make out) their dividend rate was dropping (as it was linked to Prime) while the yields on other perpetual preferred instruments were skyrocketing (due to credit concerns). Thus, at least some investors insisted on getting long term corporate yields from rates based (indirectly and with a lag, in the case of FixedResets) on short-term government policy rates. And it’s happening again!

Here’s the April performance for FixedResets that had a YTW Scenario of ‘To Perptuity’ at mid-month.:

FR_1MoPerf_150430
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The end-of-month rally has been rather disorderly; correlations between Issue Reset Spread and monthly performance for April are basically zero.