PrefBlog

In the comments to another post, Assiduous Reader mpisni asks:

Hi James, Recently we have seen issues rated at lower ratings take some big hits ( FTS, SLF, ) but the recent issues in the 5.6% to 6 % range have remained relatively unaffected.

Is this because of the dividend rate, higher ratings ?

How will these issues prices be effected down the road and how much will rates have to increase to see negative effects on their prices

Thanks James

I don’t really have a LOT of time to deal with this right now, but …

I’ve uploaded an Excel Spreadsheet showing the following data:

• ticker
• 5/30 YTW
• 5/30 Price
• DBRS Rating
• Total Return 5/30-6/13 (bid side)

The spreadsheet includes a graph!

You can play with these data as much as you like … and if anybody can answer any of mpisni‘s questions (particularly the implicit “When will this be over?” part) … let me know!

If I had to give an answer and if my answer had to assume rationality of the market over any given two-week period (both of these are rather big ifs), I’d suggest that one hypothesis to test would be that

• The market is anticipating further increases in long yields
• Therefore, it is marking the “negative convexity” yield-premium down really low, since it assumes that there is no potential for capital gains being given up

See my article on convexity if you don’t have a clue what I’m blathering about.

Update: Note that this is a hot issue because it appears the preferred share market has hit a new 15-month trough … particularly, I think, when today is finally over!

Update: OK, there are two more possibilities:

• The price paid for convexity was too much on 5/30; the market’s just readjusting … well … all I can say is: I don’t buy it.
• Brokers are dumping their losers. Retail stockbrokers seek to avoid criticism. They’ve been getting worried calls from unsophisticated clients all year about ‘How come that new issue you sold me is down so much?’ They’re making the judgement that, at the very least, recovery is not imminent and simply dumping it. The near-par stuff isn’t getting dumped because they’re not getting any calls about that stuff.

Update: Yet another possibility! I know of at least one stockbroker who, last November, was aggressively getting his clients into preferreds on the grounds that when the BCE issues got redeemed, a tsunami of money would boost prices of existing issues.

Some such clients might be getting a little dubious about the “when”.

Doom! Carnage! Destruction! There have been better days, as Napolean said at Waterloo.

The market was down significantly today as inflation fears appear – for the nonce – to be affecting corporates as much as Canadas. PerpetualDiscounts now yield 5.85% as dividends, which (at the Ontario Interest-Equivalency Factor of 1.4x) provides the same after-tax income as interest of 8.18%. Long Corporate Bonds now yield a bit over 6.1%, so the interest-equivalent-spread is remaining fairly stable in its 190-210 basis point range.

CPD set a new 52-week low today, trading in a range of 17.44-66 and closing at 17.50-61, 6×250.

Assiduous, but gloomy, Readers will be fond of my article When Will Preferreds Recover?, in which I pointed out:

I have examined the last 14 years history of the BMO-CM 50 Preferred Share Index (since December 31, 1993) and the peak-to-trough performance of this index, from the peak at March 30, 2007 to November 30, 2007, is the worst on record. This period’s loss of 7.4% is unmatched by any other decline.

As a matter of fact, the previous worst peak-to-trough performance is that realized from March 30 to October 31 of this year. November’s poor returns were merely icing on the cake. The worst period previously, from the peak of January 1999 to the trough of February 29, 2000, experienced a loss of a mere 6.1%.

Daily figures for the BMOCM-50 are not available … not to me, anyway! But we can have a look at CPD as a proxy:

The MER on CPD is reported to be 0.45% p.a. Those seeking solace can add back a pro-rata share of this figure.

Malachite Aggressive Preferred Fund (“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 MAPF or any other fund. For more information, see the fund’s main page.

A rough estimate of MAPF performance for the month-to-date is approximately: down 2.45% before fees and expenses. Expenses are capped at 50bp annually; fees are on a sliding scale depending upon amount invested. This figure is an estimate only and, even assuming perfect accuracy, does not necessarily reflect either the absolute or the relative figures that will be reported after month-end.

Long Corporates are reported to be down 1.09% for the month, down 2.57% for the calendar year to date (both figures represent total return of the DEX Long Term Corporate Bond Index).

It is most interesting to see that PerpetualDiscounts have managed to stay a little ahead of the game through the period … but on November 30 they had been marked down pretty low!

There are a few blanks in this post. I’ll fill them in shortly. All done!