I just assume GOC 5 year to be zero forever. I know it’s likely to be false over the long term, but if we make a purchase with this assumption, there will be a huge margin of safety to the investor.

There are blue chips available today that are trading a good 20 to 30% below par and will yield over 4% even at zero interest rate.

So your call risk is mitigated by the baked in capital gains and deflation risk is addressed by a huge effective spread.

That is a stellar investment opportunity IMHO that nobody on Bay Street would willingly give to investors.

]]>I don’t know the precise mechanics of *skeptical*‘s calculation, but I use the FixedReset Yield Calculator described at What is the Yield of HSE.PR.A?.

In that implementation, you only input one rate for the GOC-5 yield and that applies forever and ever, amen.

I can see – if I squint – implementing something whereby one rate would be used to calculate resets for the next X years and a different rate would used to calculate later resets, but assuming that rates will be zero until the end of time seems very aggressive to me, given the Central Banks’ success at keeping inflation in the 2% range.

]]>This week I used 1.50%. It was a pretty good figure until Friday!

Normally I set the rate for the week on Monday morning or – when applicable – on the Friday that commences PrefLetter weekend, so the numbers used in the newsletter will be as accurate as possible.

There have been a couple of times I’ve updated the system mid-week due to large moves, but I’ve found that the relative value analysis that I do via HIMIPref™ is not as sensitive to changes in the five-year rate as one might think.

*At the risk of being called a lunatic, when evaluating the rate resets, I do my calculations with GOC 5 year set to zero.*

I can see using zero as a measure of downside risk, although using it as the central assumption seems pretty extreme. But to each his own.

As implied above, the critical thing for relative value analysis is to use the same number consistently throughout the universe examined. Once you do that you’re more than halfway home, almost irrespective of the actual number used.

]]>Japan has been there for many years and so has Europe. If GOC 5 year falls close to zero, nothing devastating would happen. No catastrophes will unfold. More printing by Central banks and more deficit spending by the governments.

I was reading the other day that Denmark has negative mortgage rates.

An agile investor should be prepared for a low rate multi-year possibility, just like he is for a high-rate/inflation possibility.

Just a charming thought for Friday night!

]]>Just out of interest, your YTW calculations today are based on what value of GoC5yr? The values have changed so much this week, that, for the same bid value, the YTW of a low-spread issue like TRP.PR.B could be very sensitive to the precise value chosen. ]]>