Market Action

July 13, 2007

Bonds closed the week on a happy note, while Dura Automotive Systems reminded investors why junk got such a pejoritive name. New junk issues slowed this week as a few issues were pulled amid widening spreads.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 5.28% 5.30% 27,711 15.00 2 +0.4202% 1,019.3
Fixed-Floater 5.03% 5.33% 138,861 13.66 8 +0.4455% 1,004.2
Floater 4.86% 0.26% 79,603 4.17 4 -0.0199% 1,048.5
Op. Retract 4.83% 4.07% 84,959 2.80 16 -0.1345% 1,021.0
Split-Share 5.05% 4.57% 119,174 3.99 17 -0.0042% 1,047.0
Interest Bearing 6.22% 6.34% 66,250 4.42 3 -0.2031% 1,036.1
Perpetual-Premium 5.54% 5.16% 118,589 5.28 26 -0.0193% 1,021.8
Perpetual-Discount 5.12% 5.15% 361,990 14.86 38 +0.0583% 964.2
Major Price Changes
Issue Index Change Notes
GWO.PR.E OpRet -1.8641% Now with a pre-tax bid-YTW of 4.47% based on a bid of 25.27 and a call 2011-4-30 at 25.00. There is still some some uncertainty about GWO’s capital market plans, despite the recent successful bond issue.
CFS.PR.A SplitShare -1.400% Now with a pre-tax bid-YTW of 4.61% based on a bid of 9.86 and a hardMaturity 2012-1-31 at 10.00.
FFN.PR.A SplitShare +1.3553% Now with a pre-tax bid-YTW of 4.55% based on a bid of 10.47 and a hardMaturity 2014-12-1 at 10.00.
Volume Highlights
Issue Index Volume Notes
BMO.PR.J PerpetualDiscount 18,165 Now with a pre-tax bid-YTW of 5.09% based on a bid of 22.40 and a limitMaturity.
TOC.PR.B Floater 17,300 National Bank crossed 17,300 at 25.20 in the day’s only trade. Still on credit review negative by DBRS.
POW.PR.B PerpetualDiscount 16,700 Now with a pre-tax bid-YTW of 5.46% based on a bid of 24.56 and a limitMaturity.
SLF.PR.C PerpetualDiscount 14,795 Now with a pre-tax bid-YTW of 5.06% based on a bid of 22.15 and a limitMaturity.
SLF.PR.D PerpetualDiscount 13,458 Now with a pre-tax bid-YTW of 5.06% based on a bid of 22.15 and a limitMaturity.

There were ten other $25-equivalent index-included issues trading over 10,000 shares today.

Issue Comments

BCE.PR.A / BCE.PR.B Conversion Reminder Sent

BCE has announced:

that in accordance with the terms of its articles, it has sent a conversion notice to the holders of its Series AA Cumulative Redeemable First Preferred Shares. A copy of this notice has been publicly filed by BCE on SEDAR.

It’s not entirely clear to me whether this release, dated July 13, refers to the Reminder Notice dated June 28. I think they had other things to worry about at that time!

Anyway … the conversion is effective September 1, 2007.

Comparison of Terms
  BCE.PR.A BCE.PR.B
Issued 20-million None
Dividend Unknown – % of Canadas to be announced July 18, precise figure to be announced August 7 Ratchet between 50% and 100% of Canadian Prime on par value
Teachers’ Bid Price $25.76 $25.50

I’ll post more on this as news trickles in. Most people will, I think, be better served by converting to ‘B’ …. the Teachers’ bid price is less, but not much less, but the dividends will probably be much greater in the event that the Teachers’ bid does not close.

It is interesting to note that BCE.PR.A is included in the S&P/TSX Preferred Share Index. Those who are historically inclined will remember that the long-dead Income Trust related offer bid 25.65 for BCE.PR.A.

PrefLetter

July PrefLetter Now in Preparation

The markets have closed and the July edition of PrefLetter is now being prepared.

The July version will be eMailed to clients and available for single-issue purchase with immediate delivery prior to the opening bell on Monday. I will write another post on the weekend advising when the July issue has been uploaded to the server … so watch this space carefully if you intend to order “Next Issue” or “Previous Issue”!

Interesting External Papers

The Bond Market is Excitable

Prof. Hamilton at Econbrowser commented on a speech by Bernanke in which variability of inflation expectations was discussed. JDH went on to reference a very good academic paper, The Excess Sensitivity of Long-Term Interest Rates: Evidence and Implications for Macroeconomic Models in which these effects are quantified.

Of course, that paper is nearly four years old now. In the interim, there have been expressions of regret for the disappearance of bond market vigilantes; this apparent disappearance is probably due also to indiscrimate buying by the Chinese as much as anything else. Also, probably, due to the fact that idiots such as myself, who have been saying for years that inflation of 2%-ish should mean Canadian 10-year-yields of 4.75-5.25%-ish have had our heads handed to us on a 3.75% plate.

Anyway, the paper is a good one. Abstract:

This paper demonstrates that long-term forward interest rates in the U.S. often react considerably to surprises in macroeconomic data releases and monetary policy announcements. This behavior is inconsistent with the assumption of many macroeconomic models that the long-run properties of the economy are time-invariant and perfectly known by all economic agents. Under those conditions, the shocks we consider would have only transitory effects on short-term interest rates, and hence would not generate large responses in forward rates. Our empirical findings suggest that private agents adjust their expectations of the long-run inflation rate in response to macroeconomic and monetary policy surprises. Consistent with our hypothesis, forward rates derived from inflation-indexed Treasury debt show little sensitivity to these shocks, indicating that the response of nominal forward rates is mostly driven by inflation compensation. In addition, we find that in the U.K., where the long-run inflation target is known by the private sector, long-term forward rates have not demonstrated excess sensitivity since the Bank of England achieved independence in mid-1997. We present an alternative model in which agents’ perceptions of long-run inflation are not completely anchored, which fits all of our empirical results.

Market Action

July 12, 2007

In what may well signal the final descent of this degenerate society into slovenly barbaric torpor, a Toronto dry-cleaning conglomerate filed for CCCA protection today. The Bank of Canada projected 3% inflation in 4Q07, possibly because track-suit-wearing sluggards are usually too spaced out to care what they pay for things.

Bonds had a bad day, enlivened by mass downgrades of sub-prime paper, much of it packaged by General Electric, which is planning to exit the business.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 5.32% 5.34% 27,985 14.92 2 -0.4149% 1,015.0
Fixed-Floater 5.06% 5.35% 141,129 15.03 8 +0.1023% 999.8
Floater 4.86% -0.04% 79,938 4.16 4 -0.0080% 1,048.8
Op. Retract 4.82% 3.97% 85,714 2.98 16 +0.1017% 1,022.3
Split-Share 5.05% 4.55% 121,137 3.99 17 +0.1023% 1,047.0
Interest Bearing 6.21% 6.28% 67,179 4.43 3 -0.1351% 1,038.2
Perpetual-Premium 5.54% 5.15% 119,848 5.81 26 +0.0351% 1,022.0
Perpetual-Discount 5.12% 5.15% 368,263 14.85 38 -0.1441% 963.6
Major Price Changes
Issue Index Change Notes
PWF.PR.K PerpetualDiscount -1.4013% Now with a pre-tax bid-YTW of 5.34% based on a bid of 23.22 and a limitMaturity.
SLF.PR.C PerpetualDiscount -1.3393% Now with a pre-tax bid-YTW of 5.07% based on a bid of 22.10 and a limitMaturity.
BMO.PR.J PerpetualDiscount -1.0667% Now with a pre-tax bid-YTW of 5.12% based on a bid of 22.26 and a limitMaturity.
BCE.PR.T FixFloat -1.0504%  
PWF.PR.F PerpetualPremium (for now!) +1.2270% Now with a pre-tax bid-YTW of 5.30% based on a bid of 24.75 and a limitMaturity.
BAM.PR.G FixFloat +1.2657%  
CFS.PR.A SplitShare +1.4199% Now with a pre-tax bid-YTW of 4.26% based on a bid of 10.00 and a hardMaturity 2012-1-31 at 10.00
Volume Highlights
Issue Index Volume Notes
SLF.PR.E PerpetualDiscount 57,220 Scotia crossed 42,700 at 22.50. Now with a pre-tax bid-YTW of 5.07% based on a bid of 22.36 and a limitMaturity.
ACO.PR.A OpRet 50,270 Nesbitt crossed 50,000 at 27.00. Now with a pre-tax bid-YTW of 3.54% based on a bid of 26.90 and a softMaturity 2011-11-30 at 25.00.
FTU.PR.A SplitShare 76,900 Scotia crossed 76,000 at 10.30. Now with a pre-tax bid-YTW of 4.73% based on a bid of 10.27 and a hardMaturity 2012-12-01 at 10.00.
SLF.PR.D PerpetualDiscount 24,971 Now with a pre-tax bid-YTW of 5.07% based on a bid of 22.10 and a limitMaturity.
PWF.PR.F PerpetualPremium (for now!) 23,030 See “Major Price Moves”, above.

There were fourteen other $25-equivalent index-included issues trading over 10,000 shares today.

Issue Comments

Falconbridge Dividends are "Eligible"

The Falconbridge preferreds, FAL.PR.A, FAL.PR.B & FAL.PR.H, don’t get mentioned on this blog very much – and I have even complained about them.

However, investors should know of the Xstrata 2007-06-19 Press Release which states:

On February 21, 2007, the Parliament of Canada enacted amendments to the Income Tax Act (Canada) which are intended to reduce the personal tax rate on “eligible dividends” paid after 2005. Falconbridge hereby notifies its holders of preferred shares that the full amounts of the dividends to be paid on the respective series of preferred shares set out above are designated as eligible dividends for purposes of these amendments and any applicable corresponding provincial provisions

Issue Comments

Rio Tinto Makes Friendly Bid for Alcan (AL.PR.E, AL.PR.F)

Alcan has announced:

they have reached an agreement for Rio Tinto to make an offer to acquire all of Alcan’s outstanding common shares for US$101 per common share in a recommended, all cash transaction.

There is no mention of the preferred shares ( AL.PR.E & AL.PR.F ) or whether Rio Tinto will take the necessary steps to ensure that the dividends thereon are considered “eligible dividends”.

The preferreds are currently on “Credit Watch – Developing” by DBRS.

Update: DBRS is maintaining the “Credit Watch – Developing”:

DBRS is maintaining the ratings of Alcan Inc. (Alcan) Under Review with Developing Implications following Rio Tinto Plc’s (Rio) announcement today to acquire Alcan in a friendly takeover for $38.1 billion.
…
In the event that this transaction is completed based on the current structure of Rio’s offer, DBRS would expect Rio’s rating to flow through to Alcan’s rating. Currently, Rio’s rating is AA (low), Under Review with Negative Implications. DBRS notes that other mining conglomerates may yet elect to make a higher bid for Alcan.

Note that Alcan’s bond rating is A(low), so unless Rio was severely downgraded, a flowthrough would improve credit quality.

Update: Alcoa’s offer has been withdrawn, amid speculation that it has become a target itself.

Market Action

July 11, 2007

There was the usual news today: A story about the bonds dip (I know him, he’s the guy at [Deleted on Legal Advice]), Treasuries dropped, credit spreads widened (even in America), Korea tightened, and there are fears Japan might tighten. Same old.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 5.32% 5.34% 27,793 14.93 2 +0.9492% 1,019.2
Fixed-Floater 5.05% 5.36% 140,345 15.00 8 -0.0912% 998.7
Floater 4.66% -0.18% 77,866 8.43 4 +0.1107% 1,048.8
Op. Retract 4.83% 4.01% 86,057 3.02 16 -0.0671% 1,021.3
Split-Share 5.05% 4.64% 122,364 3.99 17 +0.1152% 1,045.9
Interest Bearing 6.19% 6.27% 68,186 4.44 3 -0.0339% 1,039.6
Perpetual-Premium 5.54% 5.10% 120,245 5.67 26 +0.1568% 1,021.6
Perpetual-Discount 5.11% 5.14% 373,572 14.87 38 -0.1460% 965.0
Major Price Changes
Issue Index Change Notes
ELF.PR.G PerpetualDiscount -2.8033% Perhaps related to its removal from the S&P/TSX Index? None of the other removals were hit nearly as badly. Now with a pre-tax bid-YTW of 5.65% based on a bid of 21.15 and a limitMaturity.
PWF.PR.F PerpetualPremium (for now!) -1.0121% Added to the index. Now with a pre-tax bid-YTW of 5.37% based on a bid of 24.45 and a limitMaturity.
IAG.PR.A PerpetualDiscount +1.2826% Now with a pre-tax bid-YTW of 5.05% based on a bid of 22.90 and a limitMaturity.
BCE.PR.S Ratchet +1.4799%  
MIC.PR.A PerpetualPremium (Recent add) +1.1760% Now with a pre-tax bid-YTW of 5.44% based on a bid of 25.75 and a call 2012-1-30 at 25.00.
NA.PR.K PerpetualPremium +1.4479% Ex-Dividend today. Now with a pre-tax bid-YTW of 3.99% based on a bid of 26.25 and a call 2008-6-14 at 26.00.
Volume Highlights
Issue Index Volume Notes
AL.PR.F Scraps (would be Floater, but there are volume concerns) 151,725 Ex-Dividend today for $0.28125. Global crossed 75,600 at 24.97 for cash, then 75,600 at 24.68 for regular settlement.
HSB.PR.D PerpetualPremium 51,700 Scotia crossed 50,000 at 25.20. Now with a pre-tax bid-YTW of 4.98% based on a bid of 25.12 and a call 2015-1-30 at 25.00.
CIU.PR.A PerpetualDiscount 25,700 Added to the index. RBC crossed 25,000 at 23.10. Now with a pre-tax bid-YTW of 5.06% based on a bid of 23.01 and a limitMaturity.
CM.PR.J PerpetualDiscount 25,560 Now with a pre-tax bid-YTW of 5.12% based on a bid of 22.02 and a limitMaturity.
CM.PR.D PerpetualPremium 18,261 Now with a pre-tax bid-YTW of 5.01% based on a bid of 25.77 and a call 2012-5-30 at 25.00

There were fifteen other $25-equivalent index-included issues trading over 10,000 shares today.

Data Changes

BSN.PR.A to be Redeemed

BSN.PR.A, which I complained about last week, has announced:

The Board of Directors of BNS Split Corp. (the “Company”) has declared today dividends of $0.3162 per Preferred Share and $0.2275 per Capital Share, payable on August 2, 2007 to holders of record at the close of business on July 30, 2007.

Holders of Preferred Shares are entitled to receive quarterly fixed cumulative distributions equal to $0.3162 per Preferred Share.

…

The Capital Shares and Preferred Shares will be redeemed by the Company on August 2, 2007 (the “Redemption Date”) in accordance with the redemption provisions of the shares. Pursuant to these provisions, the Preferred Shares will be redeemed at a price per share equal to the lesser of $23.00 and the Net Asset Value per Unit. The Capital Shares will be redeemed at a price for every two shares equal to the amount by which the Net Asset Value per Unit exceeds $23.00.

HIMIPref™ data for the final dividend has been adjusted.

Update 2007-07-31: It should come as no surprise to learn that the redemption price on the prefs is $23.00.

Indices and ETFs

Changes to S&P/TSX Preferred Share Index

Standard and Poor’s has announced:

the following index changes as a result of the semi-annual S&P/TSX Preferred Share Index Review. These changes will be effective at the open on Monday, July 23, 2007

Additions:

ADDITIONS
S&P/TSX Preferred Share Index Additions Effective 2007-7-23
Ticker HIMI Index
FBS.PR.B SplitShare
ALB.PR.A SplitShare
BNA.PR.C SplitShare
BMO.PR.J PerpetualDiscount
BMO.PR.H PerpetualPremium
BMO.PR.I OpRet
BNS.PR.L PerpetualDiscount
BCE.PR.F Not in HIMIPref™ universe
BAM.PR.K Floater
BPO.PR.F Scraps (Credit)
BPO.PR.H Scraps (Credit)
CM.PR.H PerpetualDiscount
CIU.PR.A PerpetualDiscount
DFN.PR.A SplitShare
DW.PR.A Scraps (Credit)
FIG.PR.A InterestBearing
LBS.PR.A SplitShare
NSI.PR.D Scraps (Volume)
POW.PR.B PerpetualDiscount
POW.PR.C PerpetualPremium
PWF.PR.F PerpetualPremium (for now!)
PIC.PR.A SplitShare
RPA.PR.A Not in HIMIPref™ universe
RPB.PR.A Not in HIMIPref™ universe
WFS.PR.A SplitShare
YPG.PR.A Scraps (Credit)
DELETIONS
S&P/TSX Preferred Share Index Deletions Effective 2007-7-23
Ticker HIMI Index
CL.PR.B PerpetualPremium
CM.PR.C PerpetualPremium
ELF.PR.G PerpetualDiscount
FAL.PR.A Scraps (Credit)
FTS.PR.E Scraps (Credit)
W.PR.J PerpetualPremium

It’s a good thing to see that Split Shares have been added to the index – although, sadly, it makes the index a little tougher to beat.

Total changes to the S&P Index, in terms of the HIMI Indices, are:

Changes in issues included in S&P/TSX Index, Effective 2007-07-23
Ratchet  0
FixFloat  0
Floater  +1
OpRet  +1
SplitShare  +7
InterestBearing  +1
PerpetualPremium  0
PerpetualDiscount  +4
Scraps  +3
Not in Universe  +3

Hat tip to assiduous reader MP, who asked “What’s happening with ELF.PR.G?” and thereby tipped me off to the index change. I wonder how the Claymore ETF will handle this … I’ll bet they’re annoyed!