PrefBlog

MAPF

MAPF Performance : February, 2018

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close February 28, 2018, was $10.4444.

Returns to February 28, 2018
Period	MAPF	BMO-CM “50” Preferred Share Index	TXPR* Total Return	CPD – according to Blackrock
One Month	-0.92%	-1.07%	-1.05%	N/A
Three Months	+3.93%	+1.40%	+0.57%	N/A
One Year	+17.97%	+10.43%	+8.15%	+7.78%
Two Years (annualized)	+28.70%	+21.56%	+18.96%	N/A
Three Years (annualized)	+6.53%	+4.81%	+2.82%	+2.47%
Four Years (annualized)	+5.58%	+3.27%	+2.19%	N/A
Five Years (annualized)	+4.03%	+2.44%	+1.31%	+0.94%
Six Years (annualized)	+4.72%	+2.85%	+1.94%	N/A
Seven Years (annualized)	+4.43%	+3.40%	+2.44%	N/A
Eight Years (annualized)	+6.32%	+4.40%%	+3.34%	N/A
Nine Years (annualized)	+10.77%	+6.76%	+5.47%	N/A
Ten Years (annualized)	+9.62%	+4.16%	+2.98%	+2.47%
Eleven Years (annualized)	+9.05%	+3.38%
Twelve Years (annualized)	+8.85%	+3.47%
Thirteen Years (annualized)	+8.60%	+3.51%
Fourteen Years (annualized)	+8.65%	+3.52%
Fifteen Years (annualized)	+9.98%	+3.93%
Sixteen Years (annualized)	+9.39%	+3.82%
MAPF returns assume reinvestment of distributions, and are shown after expenses but before fees.
The full name of the BMO-CM “50” index is the BMO Capital Markets “50” Preferred Share Index. It is calculated without accounting for fees.
“TXPR” is the S&P/TSX Preferred Share Index. It is calculated without accounting for fees, but does assume reinvestment of dividends.
CPD Returns are for the NAV and are after all fees and expenses. Reinvestment of dividends is assumed.
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 -1.30%, +0.72% and +7.91%, respectively, according to Morningstar after all fees & expenses. Three year performance is +3.17%; five year is +2.29%; ten year is +3.61%
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 -1.57%, +0.87% & +8.63%, respectively. Three year performance is +3.47%. It will be noted that AIC Preferred Income Fund was in existence prior to August, 2009, but long term performance figures have been suppressed.
Figures for Horizons Active Preferred Share ETF (HPR) (which are after all fees and expenses) for 1-, 3- and 12-months are -1.06%, +1.19% & +9.90%, respectively. Three year performance is +4.89%, five-year is +3.01%
Figures for National Bank Preferred Equity Fund (formerly Altamira Preferred Equity Fund) are -1.17%, +0.99% and +8.82% for one-, three- and twelve months, respectively. Three year performance is +3.98%; five-year is +1.60% According to the fund’s fact sheet as of June 30, 2016, the fund’s inception date was October 30, 2015. I do not know how they justify this nonsensical statement, but will assume that prior performance is being suppressed in some perfectly legal manner that somebody at National considers ethical.
The figures for the NAV of BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR) is +8.99% for the past twelve months. Two year performance is +22.31%, three year is +2.11%, five year is -0.50%.
Figures for Natixis Canadian Preferred Share Class (formerly NexGen Canadian Preferred Share Tax Managed Fund) are -%, +% and -% for one-, three- and twelve-months, respectively.
Figures for BMO Preferred Share Fund are +1.80% and +7.61% for the past three- and twelve-months, respectively. Three year performance is +1.90%.
Figures for PowerShares Canadian Preferred Share Index Class, Series F are +9.01% for the past twelve months. The three-year figure is +4.49%; five years is +1.82%
Figures for the First Asset Preferred Share Investment Trust (PSF.UN) are no longer available since the fund has merged with First Asset Preferred Share ETF (FPR)
Figures for Lysander-Slater Preferred Share Dividend Fund according to Morningstar are -1.19%, +0.51% and +8.81% for the past one, three and twelve months, respectively. Three year performance is +4.09%.

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.

Obviously, the last twelve months have been superb for both preferred shares in general and the fund in particular, but I think that there is still room for outsized gains. The Seniority Spread (the interest-equivalent yield on reasonably liquid, investment-grade PerpetualDiscounts less the yield on long term corporate bonds) is still quite elevated (chart end-date 2018-2-9):

Click for Big

… and the relationship between five-year Canada yields and yields on investment-grade FixedResets is also well within what I consider ‘decoupled panic’ territory (chart end-date 2018-2-9:

Click for Big

In addition, I feel that the yield on five-year Canadas is unsustainably low (it should be the inflation rate plus an increment of … 1%? 1.5%? 2.0%?),and a return to sustainable levels is likely over the medium term.

FixedReset performance on the month was -0.70% vs. PerpetualDiscounts of -2.47% in February; over the past three months, FixedResets have outperformed by about 4% as, I think, convictions have risen that interest rates are going to rise.:

Click for Big

It is noteworthy that Floaters turned in a performance of 5.73% for February and a jaw-dropping 48.75% for the past twelve months. But look at the long-term performance:

Click for Big

Two years of astounding performance has not been enough to return Floaters to their post-Credit-Crunch peak. Some Assiduous Readers will be interested to observe that the ‘Quantitative Easing’ decline was not as bad as the ‘Credit Crunch’ decline, which took the sector down to the point where the 15-year cumulative total return was negative. I wrote about that at the time and still can’t get over it. Fifteen years!

As for the future, of course, it’s one thing to say that ‘spreads are unsustainable and so are government yields’ and it’s quite another to forecast just how and when a more economically sustainable environment will take effect. It could be years. There could be a reversal, particularly if Trump’s international trade policies cause a severe recession or even a depression. And, of course, I could be just plain wrong about the sustainability of the current environment.

I think that a broad, sustainable rally in FixedResets will require higher five-year Canada yields (or a widespread expectation of them) … and although I’m sure this will happen eventually, it would be foolish to speculate on just when it will happen!

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
June, 2015	9.4181	5.55%	1.002	5.539%	1.0000	$0.5217
September	7.8140	6.98%	0.999	6.987%	1.0000	$0.5460
December, 2015	8.1379	6.85%	0.997	6.871%	1.0000	$0.5592
March, 2016	7.4416	7.79%	0.998	7.805%	1.0000	$0.5808
June	7.6704	7.67%	1.011	7.587%	1.0000	$0.5819
September	8.0590	7.35%	0.993	7.402%	1.0000	$0.5965
December, 2016	8.5844	7.24%	0.990	7.313%	1.0000	$0.6278
March, 2017	9.3984	6.26%	0.994	6.298%	1.0000	$0.5919
June	9.5313	6.41%	0.998	6.423%	1.0000	$0.6122
September	9.7129	6.56%	0.998	6.573%	1.0000	$0.6384
December, 2017	10.0566	6.06%	1.004	6.036%	1.0000	$0.6070
February, 2018	10.4444	5.90%	0.995	5.930%	1.0000	$0.6194
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.

These calculations were performed assuming constant contemporary GOC-5 and 3-Month Bill rates, as follows:

Canada Yields Assumed in Calculations
Month-end	GOC-5	3-Month Bill
September, 2015	0.78%	0.40%
December, 2015	0.71%	0.46%
March, 2016	0.70%	0.44%
June	0.57%	0.47%
September	0.58%	0.53%
December, 2016	1.16%	0.47%
March, 2017	1.08%	0.55%
June	1.35%	0.69%
September	1.79%	0.97%
December, 2017	1.83%	1.00%
February, 2018	2.03%	1.09%

Significant positions were held in NVCC non-compliant regulated FixedReset issues on February 28, 2018; 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. It will also be noted that my analysis of likely insurance industry regulation as updated is not given much weight by the market.

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 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.

MAPF

MAPF Portfolio Composition : February, 2018

Turnover remained steady at about 7% in February.

There is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relatively homogeneous Straight Perpetual class of preferreds into three parts:

Unaffected Straight Perpetuals
DeemedRetractibles explicitly subject to the rules (banks)
DeemedRetractibles considered by me, but not (yet!) by the market, to be likely to be explicitly subject to the rules in the future (insurers and insurance holding companies)

This segmentation, and the extreme valuation differences between the segments, has cut down markedly on the opportunities for trading.

To make this more clear, it used to be that there were 70-odd Straight Perpetuals and I was more or less indifferent as to which ones I owned (subject, of course, to issuer concentration concerns and other risk management factors). Thus, if any one of these 70 were to go down in price by – say – $0.25, I would quite often have something in inventory that I’d be willing to swap for it. The segmentation means that I am no longer indifferent; in addition to checking the valuation of a potential buy to other Straights, I also have to check its peer group. This cuts down on the potential for trading.

And, of course, the same segmentation has the same effect on trading opportunities between FixedReset issues.

There is no real hope that this situation will be corrected in the near-term. OSFI has indicated that the long-promised “Draft Definition of Capital” for insurers will not be issued “for public consultation in late 2012 or early 2013”, as they fear that it might encourage speculation in the marketplace. It is not clear why OSFI is so afraid of informed speculation, since the constant speculation in the marketplace is currently less informed than it would be with a little bit of regulatory clarity. While the framework has been updated, the modifications focus on the amount of capital required, not the required characteristics of that capital. However, OSFI has recently indicated that it would support a mechanism similar to the NVCC rule for banks, so we may see some developments as the IAIS deliberations regarding insurance capital continue.

As a result of this delay, I have extended the Deemed Maturity date for insurers and insurance holding companies by three years (to 2025-1-31), in the expectation that when OSFI finally does provide clarity, they will allow the same degree of lead-in time for these companies as they did for banks. This had a major effect on the durations of preferred shares subject to the change but, fortunately, not much on their calculated yields as most of these issues were either trading near par when the change was made or were trading at sufficient premium that a par call was expected on economic grounds. However, with the declines in the market over the past nine months, the expected capital gain on redemption of the insurance-issued DeemedRetractibles has become an important component of the calculated yield.

Due to the footdragging by OSFI, I will be extending the DeemedMaturity date for insurance issues by another few years in the near future.

Sectoral distribution of the MAPF portfolio on February 28 was as follows:

MAPF Sectoral Analysis 2018-02-28
HIMI Indices Sector	Weighting	YTW	ModDur
Ratchet	0%	N/A	N/A
FixFloat	0%	N/A	N/A
Floater	0%	N/A	N/A
OpRet	0%	N/A	N/A
SplitShare	8.4%	4.54%	5.24
Interest Rearing	0%	N/A	N/A
PerpetualPremium	0%	N/A	N/A
PerpetualDiscount	7.7%	5.42%	14.81
Fixed-Reset	64.22%	5.97%	9.37
Deemed-Retractible	4.2%	7.27%	5.82
FloatingReset	5.0%	6.15%	6.21
Scraps (Various)	10.0%	6.53%	13.61
Cash	+0.5%	0.00%	0.00
Total	100%	5.90%	9.51
Totals and changes will not add precisely due to rounding. Cash is included in totals with duration and yield both equal to zero.
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. These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 (banks) or 2025-1-3 (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: NVCC Status Confirmed and the January, February, March and June, 2011, editions of PrefLetter for the rationale behind this analysis. Note that the estimate for the time this will become effective for insurers and insurance holding companies was extended by three years in April 2013, due to the delays in OSFI’s providing clarity on the issue.
Calculations of resettable instruments are performed assuming a constant GOC-5 rate of 2.03% and a constant 3-Month Bill rate of 1.09%

The “total” reflects the un-leveraged total portfolio (i.e., cash is included in the portfolio calculations and is deemed to have a duration and yield of 0.00.). MAPF will often have relatively large cash balances, both credit and debit, to facilitate trading. Figures presented in the table have been rounded to the indicated precision.

Credit distribution is:

MAPF Credit Analysis 2018-02-28
DBRS Rating	Weighting
Pfd-1	0
Pfd-1(low)	0
Pfd-2(high)	36.8%
Pfd-2	32.3%
Pfd-2(low)	20.4%
Pfd-3(high)	3.1%
Pfd-3	3.7%
Pfd-3(low)	2.6%
Pfd-4(high)	0%
Pfd-4	0%
Pfd-4(low)	0%
Pfd-5(high)	0.6%
Pfd-5	0.0%
Cash	+0.5%
Totals will not add precisely due to rounding.
The fund holds a position in AZP.PR.C, which is rated P-5(high) by S&P and is unrated by DBRS; it is included in the Pfd-5(high) total.
A position held in INE.PR.A is not rated by DBRS, but has been included as “Pfd-3” in the above table on the basis of its S&P rating of P-3.

Liquidity Distribution is:

MAPF Liquidity Analysis 2018-02-28
Average Daily Trading	Weighting
<$50,000	17.5%
$50,000 – $100,000	50.3%
$100,000 – $200,000	30.5%
$200,000 – $300,000	1.2%
>$300,000	0%
Cash	+0.5%
Totals will not add precisely due to rounding.

MAPF is, of course, Malachite Aggressive Preferred Fund, a “unit trust” managed by Hymas Investment Management Inc. Further information and links to performance, audited financials and subscription information are available the fund’s web page. The fund may be purchased either directly from Hymas Investment Management or through a brokerage account at Odlum Brown Limited. A “unit trust” is like a regular mutual fund, but is sold by offering memorandum rather than prospectus. This is cheaper, but means subscription is restricted to “accredited investors” (as defined by the Ontario Securities Commission). Fund past performances are not a guarantee of future performance. You can lose money investing in MAPF or any other fund.

A similar portfolio composition analysis has been performed on the Claymore Preferred Share ETF (symbol CPD) (and other funds) as of July 31, 2017, and published in the August, 2017, PrefLetter. It is fair to say:

MAPF credit quality is much better
MAPF liquidity is lower
MAPF Yield is higher
Weightings
- MAPF is less exposed to Straight Perpetuals
  - About equally exposed to PerpetualDiscounts
  - Much less exposed to DeemedRetractibles
  - Much less exposed to PerpetualPremiums
- Neither portfolio is exposed to Operating Retractibles (there aren’t too many of those any more!)
- MAPF is more exposed to SplitShares
- MAPF is less exposed to FixFloat / Floater / Ratchet
- MAPF is a little higher weighted in FixedResets, but has a greater emphasis on lower-spread issues

Issue Comments

LCS.PR.A To Be Extended

Brompton Group has announced:

Brompton Lifeco Split Corp. (the “Company”) is pleased to announce that the board of directors has approved an extension of the maturity date of the Class A and Preferred shares of the Company for an additional 5 year term to April 29, 2024. The reset preferred share dividend rate for the extended term will be announced at least 60 days prior to the original April 29, 2019 maturity date and will be based on market yields for preferred shares with similar terms at that time.

The term extension allows Class A shareholders to continue their investment in Canadian life insurance companies while offering an attractive distribution rate of 13% (based on the February 28, 2018 closing price) and the opportunity for capital appreciation. Over the last 5 years to January 31, 2018, the Class A share has delivered a 29.1% per annum return, which outperformed the S&P/TSX Capped Financials Index by 15.5% per annum and outperformed the S&P/TSX Composite Index by 21.3% per annum.(1) Since inception to January 31, 2018, Class A shareholders have received cash distributions of $5.13. Class A shareholders have the option to reinvest their cash distributions in a dividend reinvestment plan which is commission free to participants.

The term extension offers Preferred shareholders the opportunity to enjoy preferential cash dividends until April 29, 2024. Over the last 5 years to January 31, 2018, the Preferred share has delivered a 5.8% per annum return, outperforming the S&P/TSX Preferred Share Index by 4.2% per annum with less volatility.(1)
Brompton Lifeco Split Corp. invests in a portfolio of common shares of Canada’s four largest publicly-listed life insurance companies, on an approximately equal weight basis: Great-West Lifeco Inc., Industrial Alliance Insurance and Financial Services Inc., Manulife Financial Corporation and Sun Life Financial Inc.
…

Brompton Lifeco Split Corp.
Performance to January 31, 2018

1 Yr 3 Yr 5 Yr 10 Yr Incep.
(04/18/07)

Class A Shares (TSX:LCS) 5.9% 21.5% 29.1% 1.1% 0.3%

S&P TSX Capped Financials Index 11.6% 14.2% 13.6% 8.8% 7.3%

S&P/TSX Composite Index 6.7% 5.9% 7.8% 5.0% 4.5%

Preferred Shares (TSX:LCS.PR.A) 5.9% 5.9% 5.8% 5.6% 5.5%

S&P/TSX Preferred Share Index 10.9% 3.2% 1.6% 3.3% 2.4%

LCS.PR.A had a treasury offering in January and was upgraded to Pfd-3(low) by DBRS last October. It is tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns.

Market Action

March 2, 2018

More trade-war chatter:

World Trade Organization Director General Roberto Azevedo expressed concern at U.S. President Donald Trump’s plan for tariffs on steel and aluminum on Friday, an extremely rare intervention into a WTO member’s trade policy.

“The WTO is clearly concerned at the announcement of U.S. plans for tariffs on steel and aluminum. The potential for escalation is real, as we have seen from the initial responses of others,” he said in a brief statement issued by the WTO.

“A trade war is in no one’s interests. The WTO will be watching the situation very closely.”

And Trump’s boasting that he’s got a bigger button than the rest of the world put together:

U.S. President Donald Trump struck a defiant tone on Friday, saying trade wars were good and easy to win, after his plan to put tariffs on imports of steel and aluminum triggered global criticism and a slide in world stock markets.

The European Union raised the possibility of taking countermeasures, France said the duties were unacceptable and China urged Trump to show restraint. Canada, the biggest supplier of steel and aluminum to the United States, said it would retaliate if hit by U.S. tariffs.

Trump said on Thursday that tariffs of 25 per cent on steel imports and 10 per cent on aluminum products were designed to safeguard American jobs in the face of cheaper foreign products and would be formally announced next week.

“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win,” Trump tweeted on Friday.

“Example, when we are down $100-billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!” he wrote.

Sure. Messrs. Smoot and Hawley won their war back in the thirties.

So, despite more pointed comments about US inflation…:

Speaking of the Fed, it was behind the S&P 500’s travails Tuesday and Wednesday, a 2.4 percent retreat that before last month would’ve qualified as the worst selloff in a year. Stocks slid as Powell, who has vowed continuity with predecessor Janet Yellen’s pace of interest-rate hikes, hinted the central bank may be faster on the draw than anticipated.

“Powell surprised people by being a bit more frank than folks expected,” said Max Gokhman, head of asset allocation for Pacific Life Fund Advisors. “That doesn’t necessarily work as a Fed chair, especially when we’re latching onto every single word that the Fed officials say.”

The new chairman been at the helm for just a month, obviously too little time to say if the markets like him. What is clear is that a combination of rate angst and Trump’s saber rattling has erased half the S&P 500’s 7.7 percent rebound from a Feb. 8 low.

For the week, the S&P 500 ended down 2 percent, almost twice as much as any decline registered in 2017. The Dow Jones Industrial Average fell 3.1 percent, while the Nasdaq 100 index lost 1.22 percent. Small-caps lost 1 percent.

… Canadian bond yields were down today, with the five-year closing at 2.00%.

Of course, poor GDP numbers probably had something to do with that:

Canada’s economy decelerated more than expected in the second half of last year, amid signs indebted households have begun slowing down spending.

The economy grew at an annualized pace of 1.7 percent in the fourth quarter, Statistics Canada reported Friday, versus economist expectations for 2 percent growth. Third-quarter gross domestic product growth was also revised down.

After leading the Group of Seven in growth last year, Friday’s numbers show a Canadian economy that has lost momentum, seemingly hampered by longstanding productivity issues and the growing potential of a hangover from the real estate boom. The U.S. economy recorded growth rates of 3.2 percent in the third quarter and 2.5 percent in the last three months of 2017.
…
What may be worse is that fourth-quarter GDP figures were exaggerated by temporary factors in housing. Spending on residential structures surged in the last three months of 2017 to an annualized 13.4 percent, the strongest quarterly increase since 2012. The gain was led by stronger-than-expected new home construction, and as buyers rushed to get ahead of tighter mortgage qualification rules that came into effect Jan. 1.

The increase in residential spending was responsible for 1 percentage point of the 1.7 percent growth rate, Statistics Canada said.

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 %	3,055.4
FixedFloater	0.00 %	0.00 %	0	0.00	0	0.0000 %	5,606.5
Floater	3.25 %	3.45 %	109,966	18.58	4	0.0000 %	3,231.1
OpRet	0.00 %	0.00 %	0	0.00	0	-0.0236 %	3,155.0
SplitShare	4.71 %	4.20 %	67,313	3.32	5	-0.0236 %	3,767.7
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.0236 %	2,939.7
Perpetual-Premium	5.46 %	5.00 %	78,249	14.41	20	-0.0080 %	2,820.3
Perpetual-Discount	5.44 %	5.54 %	92,438	14.55	14	-0.3463 %	2,921.7
FixedReset	4.25 %	4.60 %	167,875	5.90	102	0.0895 %	2,519.3
Deemed-Retractible	5.20 %	5.72 %	92,821	5.77	28	-0.0335 %	2,899.1
FloatingReset	2.95 %	2.91 %	35,033	3.70	10	-0.0913 %	2,766.5

Performance Highlights
Issue	Index	Change	Notes
TRP.PR.B	FixedReset	-1.23 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-03-02 Maturity Price : 16.89 Evaluated at bid price : 16.89 Bid-YTW : 4.70 %
TRP.PR.C	FixedReset	-1.11 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-03-02 Maturity Price : 17.85 Evaluated at bid price : 17.85 Bid-YTW : 4.76 %
PWF.PR.S	Perpetual-Discount	-1.09 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-03-02 Maturity Price : 21.57 Evaluated at bid price : 21.85 Bid-YTW : 5.54 %
HSE.PR.A	FixedReset	-1.05 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-03-02 Maturity Price : 17.83 Evaluated at bid price : 17.83 Bid-YTW : 5.01 %
TD.PF.E	FixedReset	1.19 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2020-10-31 Maturity Price : 25.00 Evaluated at bid price : 24.70 Bid-YTW : 4.32 %
W.PR.J	Perpetual-Premium	1.23 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-03-02 Maturity Price : 24.29 Evaluated at bid price : 24.60 Bid-YTW : 5.77 %
IFC.PR.C	FixedReset	1.27 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.95 Bid-YTW : 4.81 %

Volume Highlights
Issue	Index	Shares Traded	Notes
GWO.PR.G	Deemed-Retractible	167,612	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.00 Bid-YTW : 5.87 %
MFC.PR.Q	FixedReset	152,800	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.90 Bid-YTW : 4.79 %
BNS.PR.Y	FixedReset	147,402	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.25 Bid-YTW : 4.36 %
NA.PR.E	FixedReset	61,800	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-03-02 Maturity Price : 23.01 Evaluated at bid price : 24.60 Bid-YTW : 4.64 %
TD.PF.A	FixedReset	53,298	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-03-02 Maturity Price : 23.11 Evaluated at bid price : 23.51 Bid-YTW : 4.53 %
BAM.PF.J	FixedReset	49,360	YTW SCENARIO Maturity Type : Call Maturity Date : 2022-12-31 Maturity Price : 25.00 Evaluated at bid price : 25.25 Bid-YTW : 4.73 %
There were 43 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
RY.PR.M	FixedReset	Quote: 24.10 – 24.58 Spot Rate : 0.4800 Average : 0.2992 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-03-02 Maturity Price : 23.06 Evaluated at bid price : 24.10 Bid-YTW : 4.63 %
HSE.PR.A	FixedReset	Quote: 17.83 – 18.36 Spot Rate : 0.5300 Average : 0.3776 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-03-02 Maturity Price : 17.83 Evaluated at bid price : 17.83 Bid-YTW : 5.01 %
BAM.PR.R	FixedReset	Quote: 21.08 – 21.40 Spot Rate : 0.3200 Average : 0.1920 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-03-02 Maturity Price : 21.08 Evaluated at bid price : 21.08 Bid-YTW : 4.92 %
MFC.PR.H	FixedReset	Quote: 24.60 – 24.94 Spot Rate : 0.3400 Average : 0.2310 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.60 Bid-YTW : 5.42 %
TRP.PR.K	FixedReset	Quote: 25.56 – 25.86 Spot Rate : 0.3000 Average : 0.1950 YTW SCENARIO Maturity Type : Call Maturity Date : 2022-05-31 Maturity Price : 25.00 Evaluated at bid price : 25.56 Bid-YTW : 4.36 %
MFC.PR.G	FixedReset	Quote: 24.33 – 24.68 Spot Rate : 0.3500 Average : 0.2474 YTW SCENARIO Maturity Type : Call Maturity Date : 2021-12-19 Maturity Price : 25.00 Evaluated at bid price : 24.33 Bid-YTW : 4.63 %

Market Action

March 1, 2018

Let’s have a trade war!

Canada is vowing to retaliate if U.S. President Donald Trump makes good on his pledge to impose steep tariffs on steel and aluminum producers — while holding out hope that it could be exempt.

Trump said he intends to slap a 25 percent duty on steel imports and 10 percent on aluminum in order to protect the national industry, though details remain unclear. His words sent U.S.-based producers rallying but could hurt companies that ship steel and aluminum from Canada, including Rio Tinto Group and Stelco Holdings Inc., without an exemption.
…
“The President has just initiated an all-out trade war,” said Jean Simard, chief executive officer of the Aluminum Association of Canada. Aside from the direct impact on the countries affected, Europe will need to protect itself from a flood of redirected metal because the U.S. is not an open market anymore, he said.

“We have to keep hoping” for an exemption for Canada, Simard said.

London-based Rio Tinto, which ships more than 1.4 million metric tons of aluminum to the U.S. annually from Canada, said it will continue to lobby Washington for an exemption given the highly integrated Canada-U.S. market for autos and other manufactured goods.

Surprisingly:

President Donald Trump’s closest Republican allies on Capitol Hill are criticizing his plan to impose tariffs on steel and aluminum imports to protect national security, while some Democrats are applauding.

The upside-down reaction comes a day after Trump irked Republicans and pleased many Democrats by backing stricter gun-control measures and suggesting the government could take guns, initially without due process, from some citizens viewed as dangerous.

Enough of this could choke off the recovery and therefore delay the return to interest-rate normalcy:

Investments by foreign companies in Canada slumped last year to the lowest level since 2010, amid mounting concerns about national competitiveness and uncertainty surrounding the renegotiation of the North American Free Trade Agreement.

Foreign direct investment nosedived 26 per cent to $33.8 billion in 2017, Statistics Canada reported, continuing a trend of declining interest by foreign firms. And for the first time since data collection on the topic began in 2007, foreign firms sold more Canadian companies than they bought.

And it may be that we are finally getting our come-uppance for our cheap labour industrial strategy:

Energy companies are chopping their budgets even as global oil prices climb back from a crash, and may lose about C$16 billion ($12.4 billion) of revenue this year because of discounts on Alberta’s heavy crude — a problem blamed on a lack of pipeline space. Foreign direct investment in Canada, meanwhile, has fallen to the lowest since 2010.

Another unknown for investment prospects is how companies are dealing with production constraints. As firms bump up against production capacity at this high point in the economic cycle, you’d expect capital expenditure intentions to be widespread across industries. Yet capex is expected to increase just 0.8 percent even with capacity utilization hitting a 10-year high of 85 percent.

It’s possible companies are increasingly turning to the labor market to address excess demand, which would explain Canada’s string of red-hot jobs reports last year. That preference could further constrain business investment.

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	-0.3622 %	3,055.4
FixedFloater	0.00 %	0.00 %	0	0.00	0	-0.3622 %	5,606.5
Floater	3.25 %	3.46 %	101,478	18.56	4	-0.3622 %	3,231.1
OpRet	0.00 %	0.00 %	0	0.00	0	-0.0550 %	3,155.7
SplitShare	4.71 %	4.13 %	67,502	3.32	5	-0.0550 %	3,768.6
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.0550 %	2,940.4
Perpetual-Premium	5.46 %	4.99 %	79,167	14.42	20	-0.1699 %	2,820.6
Perpetual-Discount	5.43 %	5.48 %	85,677	14.64	14	-0.1523 %	2,931.8
FixedReset	4.26 %	4.59 %	165,607	5.92	102	-0.3081 %	2,517.1
Deemed-Retractible	5.20 %	5.75 %	93,250	5.77	28	-0.2597 %	2,900.1
FloatingReset	2.94 %	2.93 %	35,083	3.70	10	-0.1650 %	2,769.0

Performance Highlights
Issue	Index	Change	Notes
GWO.PR.I	Deemed-Retractible	-1.70 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.86 Bid-YTW : 7.59 %
SLF.PR.I	FixedReset	-1.65 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.85 Bid-YTW : 4.98 %
MFC.PR.R	FixedReset	-1.54 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2022-03-19 Maturity Price : 25.00 Evaluated at bid price : 25.50 Bid-YTW : 4.26 %
IFC.PR.C	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 : 5.01 %
TRP.PR.F	FloatingReset	-1.44 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-03-01 Maturity Price : 20.47 Evaluated at bid price : 20.47 Bid-YTW : 3.66 %
W.PR.J	Perpetual-Premium	-1.30 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-03-01 Maturity Price : 24.05 Evaluated at bid price : 24.30 Bid-YTW : 5.84 %
TRP.PR.B	FixedReset	-1.21 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-03-01 Maturity Price : 17.10 Evaluated at bid price : 17.10 Bid-YTW : 4.64 %
BAM.PR.T	FixedReset	-1.15 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-03-01 Maturity Price : 21.42 Evaluated at bid price : 21.42 Bid-YTW : 4.91 %
MFC.PR.M	FixedReset	-1.05 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.56 Bid-YTW : 5.25 %

Volume Highlights
Issue	Index	Shares Traded	Notes
TD.PF.A	FixedReset	155,752	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-03-01 Maturity Price : 23.11 Evaluated at bid price : 23.51 Bid-YTW : 4.53 %
RY.PR.H	FixedReset	153,395	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-03-01 Maturity Price : 23.07 Evaluated at bid price : 23.50 Bid-YTW : 4.53 %
BNS.PR.Q	FixedReset	139,700	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.95 Bid-YTW : 3.88 %
MFC.PR.K	FixedReset	126,800	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.93 Bid-YTW : 5.68 %
CM.PR.P	FixedReset	114,055	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-03-01 Maturity Price : 22.98 Evaluated at bid price : 23.33 Bid-YTW : 4.54 %
PWF.PR.P	FixedReset	72,160	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-03-01 Maturity Price : 19.70 Evaluated at bid price : 19.70 Bid-YTW : 4.39 %
There were 22 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
W.PR.J	Perpetual-Premium	Quote: 24.30 – 24.80 Spot Rate : 0.5000 Average : 0.3385 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-03-01 Maturity Price : 24.05 Evaluated at bid price : 24.30 Bid-YTW : 5.84 %
GWO.PR.I	Deemed-Retractible	Quote: 20.86 – 21.26 Spot Rate : 0.4000 Average : 0.2660 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.86 Bid-YTW : 7.59 %
SLF.PR.I	FixedReset	Quote: 23.85 – 24.18 Spot Rate : 0.3300 Average : 0.2216 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.85 Bid-YTW : 4.98 %
TRP.PR.A	FixedReset	Quote: 20.70 – 21.14 Spot Rate : 0.4400 Average : 0.3385 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-03-01 Maturity Price : 20.70 Evaluated at bid price : 20.70 Bid-YTW : 4.70 %
RY.PR.N	Perpetual-Premium	Quote: 24.70 – 24.95 Spot Rate : 0.2500 Average : 0.1686 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-03-01 Maturity Price : 24.28 Evaluated at bid price : 24.70 Bid-YTW : 4.97 %
TD.PF.D	FixedReset	Quote: 24.21 – 24.48 Spot Rate : 0.2700 Average : 0.2001 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-03-01 Maturity Price : 23.17 Evaluated at bid price : 24.21 Bid-YTW : 4.80 %

Market Action

February 28, 2018

PerpetualDiscounts now yield 5.43%, equivalent to 7.06% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little over 3.90%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 315bp, a sharp widening from the 300bp reported February 21.

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	2.7426 %	3,066.5
FixedFloater	0.00 %	0.00 %	0	0.00	0	2.7426 %	5,626.9
Floater	3.24 %	3.45 %	102,761	18.57	4	2.7426 %	3,242.8
OpRet	0.00 %	0.00 %	0	0.00	0	0.2205 %	3,157.4
SplitShare	4.70 %	4.07 %	62,502	3.32	5	0.2205 %	3,770.7
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.2205 %	2,942.0
Perpetual-Premium	5.45 %	5.05 %	77,646	14.35	20	-0.0420 %	2,825.4
Perpetual-Discount	5.42 %	5.43 %	86,305	14.72	14	-0.1900 %	2,936.3
FixedReset	4.24 %	4.57 %	166,005	4.27	102	0.1690 %	2,524.8
Deemed-Retractible	5.19 %	5.73 %	92,658	5.78	28	0.0030 %	2,907.6
FloatingReset	2.94 %	2.90 %	36,532	3.70	10	0.1458 %	2,773.6

Performance Highlights
Issue	Index	Change	Notes
BAM.PF.D	Perpetual-Discount	-1.35 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-28 Maturity Price : 21.66 Evaluated at bid price : 22.00 Bid-YTW : 5.65 %
BAM.PR.M	Perpetual-Discount	-1.21 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-28 Maturity Price : 21.30 Evaluated at bid price : 21.30 Bid-YTW : 5.68 %
BAM.PF.J	FixedReset	1.12 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2022-12-31 Maturity Price : 25.00 Evaluated at bid price : 25.30 Bid-YTW : 4.68 %
BAM.PR.X	FixedReset	1.14 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-28 Maturity Price : 18.56 Evaluated at bid price : 18.56 Bid-YTW : 4.88 %
MFC.PR.R	FixedReset	1.37 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2022-03-19 Maturity Price : 25.00 Evaluated at bid price : 25.90 Bid-YTW : 3.83 %
PWF.PR.A	Floater	2.03 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-28 Maturity Price : 21.38 Evaluated at bid price : 21.65 Bid-YTW : 2.78 %
BAM.PR.K	Floater	2.62 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-28 Maturity Price : 17.60 Evaluated at bid price : 17.60 Bid-YTW : 3.46 %
BAM.PR.C	Floater	3.10 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-28 Maturity Price : 17.63 Evaluated at bid price : 17.63 Bid-YTW : 3.46 %
BAM.PR.B	Floater	3.39 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-28 Maturity Price : 17.67 Evaluated at bid price : 17.67 Bid-YTW : 3.45 %

Volume Highlights
Issue	Index	Shares Traded	Notes
MFC.PR.Q	FixedReset	124,465	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.85 Bid-YTW : 4.82 %
BAM.PF.I	FixedReset	52,173	YTW SCENARIO Maturity Type : Call Maturity Date : 2022-03-31 Maturity Price : 25.00 Evaluated at bid price : 25.85 Bid-YTW : 4.12 %
W.PR.M	FixedReset	41,930	YTW SCENARIO Maturity Type : Call Maturity Date : 2021-10-15 Maturity Price : 25.00 Evaluated at bid price : 26.10 Bid-YTW : 4.10 %
TD.PR.S	FixedReset	41,900	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.91 Bid-YTW : 3.79 %
MFC.PR.H	FixedReset	21,800	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.60 Bid-YTW : 5.42 %
SLF.PR.A	Deemed-Retractible	21,160	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.15 Bid-YTW : 6.80 %
There were 17 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
BAM.PR.M	Perpetual-Discount	Quote: 21.30 – 21.69 Spot Rate : 0.3900 Average : 0.2625 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-28 Maturity Price : 21.30 Evaluated at bid price : 21.30 Bid-YTW : 5.68 %
CCS.PR.C	Deemed-Retractible	Quote: 23.01 – 23.56 Spot Rate : 0.5500 Average : 0.4426 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.01 Bid-YTW : 6.40 %
BAM.PF.D	Perpetual-Discount	Quote: 22.00 – 22.37 Spot Rate : 0.3700 Average : 0.2710 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-28 Maturity Price : 21.66 Evaluated at bid price : 22.00 Bid-YTW : 5.65 %
PWF.PR.L	Perpetual-Discount	Quote: 23.40 – 23.70 Spot Rate : 0.3000 Average : 0.2117 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-28 Maturity Price : 23.14 Evaluated at bid price : 23.40 Bid-YTW : 5.50 %
HSE.PR.E	FixedReset	Quote: 25.11 – 25.32 Spot Rate : 0.2100 Average : 0.1271 YTW SCENARIO Maturity Type : Call Maturity Date : 2020-03-31 Maturity Price : 25.00 Evaluated at bid price : 25.11 Bid-YTW : 4.67 %
GWO.PR.P	Deemed-Retractible	Quote: 24.67 – 24.91 Spot Rate : 0.2400 Average : 0.1589 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.67 Bid-YTW : 5.59 %

Issue Comments

MFC.PR.J : Convert or Hold?

It will be recalled that MFC.PR.J will reset at 4.731% effective March 20.

MFC.PR.J is currently a FixedReset, 4.00%+261, that commenced trading 2012-12-4 after being announced 2012-11-27. It is tracked by HIMIPref™ and is assigned to the FixedReset sub-index.

As this issue is not NVCC compliant and it is an insurance issue, it is analyzed as having a Deemed Retraction, effective 2025-1-31 (this date may change in the future).

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., MFC.PR.J and the FloatingReset MFC.PR.S that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to be relatively uninterested in floating rate product; most of the implied rates until the next interconversion are scattered around the current 3-month bill rate and the averages for investment-grade and junk issues are quite different, at +1.27% and +1.86%, respectively – although these break-even rates are much closer to the market rate than has been case for recent resets! Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the MFC.PR.J FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart, MFC.PR.S, given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset MFC.PR.S (received in exchange for MFC.PR.J) Trading Price In Current Conditions
			Assumed FloatingReset Price if Implied Bill is equal to
FixedReset	Bid Price	Spread	1.75%	1.25%	0.75%
MFC.PR.J	24.89	261bp	24.51	24.00	23.49

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of MFC.PR.J continue to hold the issue and not to convert.

I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Market Action

February 27, 2018

The federal budget came out today:

One major change is C$7.2 billion ($5.7 billion) less infrastructure spending through 2019, an amount that has been allocated to other departmental spending.
…
On a cumulative basis, including risk buffers worth C$3 billion annually, deficits over the six years including 2017-18 are projected to total C$98 billion. That’s little changed from the October forecast.
…
The government has implemented a watered-down version of reforms for “tax planning.’’
•On passive investment, the new system only gradually reduces access to the small business tax rate for corporations with significant passive investment.
•Measures will limit tax advantages that larger Canadian- controlled private corporations can obtain by accessing refundable taxes on dividends.
•The two changes combined, including new restrictions on so- called income sprinkling announced last year, will add C$925 million to government coffers annually by 2022.
•The Trudeau government is also promising new rules to prevent banks and other financial institutions “from gaining a tax advantage by creating artificial losses.’’ The move will create C$560 million annually by 2022.
•A tax increase on tobacco is worth C$1.5 billion over six years, and levies on cannabis are expected to generate C$690 million over six years after it is legalized this summer.
•Canada has also taken a C$2.1 billion hit over six years from lost tariffs due to the Trans-Pacific Partnership agreement.

I’m not happy about the continuing deficit. Government finances should be managed to break even on a through-the-cycle basis, which means that right now we should be running a small but increasing surplus.

I’m also not happy about the Inefficent Business Tax Subsidy; although there has been some progress, the legions of well-connected doctors and lawyers retain their special tax bolthole:

The budget unveiled new details on the taxation of passive investment income inside private corporations.

When companies earn between $50,000 and $150,00 in a given year from passive investments, a reduced amount of their active business income will be eligible for the small business tax rate, which will be 9 per cent in 2019. (The upper limit for business income that can be taxed at the small business rate is $500,000.) The reduction will occur on a straight-line basis, with eligible income decreasing by $5 for every $1 of passive income above the $50,000 threshold.

Companies exceeding $150,000 in passive income will no longer be eligible for the small business tax rate. Those with passive income under $50,000 will not be affected, as was mentioned in a revised proposal.

Davies Ward Phillips & Vineberg LLP has published a more detailed commentary.

In order to pay for this well-deserved reward for those old-stock Canadians who, by dint of hard work, integrity, stick-to-it-ivness and the fact that mommy and daddy were doctors and lawyers, have become doctors and lawyers, the practice of tax surcharges that increase the effective marginal tax rate on plebian scum have been retained:

Click for Big

See that? The benefits claw-back represents an increase to the posted effective marginal tax rate of 14% immediately, planned to decline (precipitously!) to 12% in the future. From this one programme alone. Yes, sir, it’s very important to destroy incentive to pick up that extra shift, accept that extra responsibility, move to a new province to get that slightly better job! They can have a little extra welfare money, as long as they don’t get too uppity.

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	-2.3024 %	2,984.7
FixedFloater	0.00 %	0.00 %	0	0.00	0	-2.3024 %	5,476.7
Floater	3.33 %	3.56 %	96,734	18.33	4	-2.3024 %	3,156.2
OpRet	0.00 %	0.00 %	0	0.00	0	-0.2356 %	3,150.5
SplitShare	4.71 %	4.07 %	62,806	3.33	5	-0.2356 %	3,762.4
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.2356 %	2,935.5
Perpetual-Premium	5.45 %	4.97 %	74,861	14.38	20	-0.0819 %	2,826.5
Perpetual-Discount	5.41 %	5.45 %	84,676	14.71	14	-0.1391 %	2,941.9
FixedReset	4.25 %	4.58 %	166,316	5.87	102	0.0592 %	2,520.6
Deemed-Retractible	5.15 %	5.74 %	92,622	5.71	28	-0.0992 %	2,907.5
FloatingReset	2.94 %	2.91 %	37,023	3.70	10	0.0129 %	2,769.5

Performance Highlights
Issue	Index	Change	Notes
BAM.PR.B	Floater	-2.68 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-27 Maturity Price : 17.09 Evaluated at bid price : 17.09 Bid-YTW : 3.57 %
BAM.PR.K	Floater	-2.67 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-27 Maturity Price : 17.15 Evaluated at bid price : 17.15 Bid-YTW : 3.56 %
BAM.PR.C	Floater	-2.51 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-27 Maturity Price : 17.10 Evaluated at bid price : 17.10 Bid-YTW : 3.57 %
PWF.PR.A	Floater	-1.53 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-27 Maturity Price : 21.22 Evaluated at bid price : 21.22 Bid-YTW : 2.86 %
MFC.PR.F	FixedReset	-1.31 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.77 Bid-YTW : 7.46 %
MFC.PR.G	FixedReset	-1.30 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2021-12-19 Maturity Price : 25.00 Evaluated at bid price : 24.38 Bid-YTW : 4.56 %
TRP.PR.H	FloatingReset	-1.26 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-27 Maturity Price : 16.96 Evaluated at bid price : 16.96 Bid-YTW : 3.48 %
BAM.PF.J	FixedReset	-1.11 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2022-12-31 Maturity Price : 25.00 Evaluated at bid price : 25.02 Bid-YTW : 4.94 %
BAM.PF.F	FixedReset	1.06 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-27 Maturity Price : 23.64 Evaluated at bid price : 24.84 Bid-YTW : 4.89 %
TRP.PR.B	FixedReset	1.07 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-27 Maturity Price : 17.25 Evaluated at bid price : 17.25 Bid-YTW : 4.60 %

Volume Highlights
Issue	Index	Shares Traded	Notes
TD.PF.A	FixedReset	346,550	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-27 Maturity Price : 23.13 Evaluated at bid price : 23.53 Bid-YTW : 4.52 %
RY.PR.H	FixedReset	311,298	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-27 Maturity Price : 23.12 Evaluated at bid price : 23.55 Bid-YTW : 4.52 %
NA.PR.A	FixedReset	279,625	YTW SCENARIO Maturity Type : Call Maturity Date : 2021-08-15 Maturity Price : 25.00 Evaluated at bid price : 26.15 Bid-YTW : 4.05 %
PWF.PR.T	FixedReset	176,575	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-27 Maturity Price : 24.30 Evaluated at bid price : 24.73 Bid-YTW : 4.46 %
SLF.PR.E	Deemed-Retractible	160,500	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.55 Bid-YTW : 7.24 %
SLF.PR.D	Deemed-Retractible	128,499	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.44 Bid-YTW : 7.27 %
BMO.PR.C	FixedReset	114,865	YTW SCENARIO Maturity Type : Call Maturity Date : 2022-05-25 Maturity Price : 25.00 Evaluated at bid price : 25.29 Bid-YTW : 4.23 %
There were 26 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
BAM.PF.E	FixedReset	Quote: 23.75 – 24.37 Spot Rate : 0.6200 Average : 0.4490 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-27 Maturity Price : 23.43 Evaluated at bid price : 23.75 Bid-YTW : 4.86 %
BAM.PR.B	Floater	Quote: 17.09 – 17.54 Spot Rate : 0.4500 Average : 0.2949 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-27 Maturity Price : 17.09 Evaluated at bid price : 17.09 Bid-YTW : 3.57 %
TRP.PR.H	FloatingReset	Quote: 16.96 – 17.55 Spot Rate : 0.5900 Average : 0.4442 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-27 Maturity Price : 16.96 Evaluated at bid price : 16.96 Bid-YTW : 3.48 %
EIT.PR.A	SplitShare	Quote: 25.12 – 25.82 Spot Rate : 0.7000 Average : 0.5655 YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2024-03-14 Maturity Price : 25.00 Evaluated at bid price : 25.12 Bid-YTW : 4.69 %
MFC.PR.R	FixedReset	Quote: 25.55 – 25.90 Spot Rate : 0.3500 Average : 0.2185 YTW SCENARIO Maturity Type : Call Maturity Date : 2022-03-19 Maturity Price : 25.00 Evaluated at bid price : 25.55 Bid-YTW : 4.20 %
BAM.PF.J	FixedReset	Quote: 25.02 – 25.40 Spot Rate : 0.3800 Average : 0.2494 YTW SCENARIO Maturity Type : Call Maturity Date : 2022-12-31 Maturity Price : 25.00 Evaluated at bid price : 25.02 Bid-YTW : 4.94 %

Administration

Toronto Rock Lacrosse Ticket Giveaway … Update #3

I have four more pairs of Toronto Rock Lacrosse tickets to give away!

The games take place at the Air Canada Centre and the seats are very good. Just tell me which ones you would like. A decision regarding who gets tickets will be made two weeks before each game and I will mail them to the lucky winner; while preference will be given to customers and those who tell me they’ve got a kid who plays lacrosse, anybody can win. If you win and don’t want your name publicized, that’s fine.

The games are:

Toronto Rock Lacrosse Ticket Giveaway
Date	Opponent
~~Saturday~~ ~~2018-1-27~~ ~~7pm~~	~~New England Black Wolves~~
~~Saturday~~ ~~2018-2-3~~ ~~7pm~~	~~Calgary Roughnecks~~
~~Saturday~~ ~~2018-3-3~~ ~~7pm~~	~~Georgia Swarm~~
~~Sunday~~ ~~2018-3-11~~ ~~3pm~~	~~New England Black Wolves~~
Friday 2018-3-30 7:30pm	Colorado Mammoth
Friday 2018-4-13 7:30pm	Rochester Knighthawks
??? ??? ???	Home Playoff Game 1 If there is one!
??? ??? ???	Coupons Redeemable for available tickets Expires 2018-4-14

The tickets for the January 27 game were given to a non-client … see, anybody can win! Assiduous Reader fed received the February 3 tickets and Assiduous Reader CC will be going to the March 3 game. PrefLetter subscriber AC won the tickets to the March 11 game. The next giveaway is for the game against Colorado Mammoth on March 30 (Good Friday) … get your eMails in! Or, get an early entry in for a later game!

The games are a lot of fun. One thing that has impressed me is that these guys’ technical skills are so good they can concentrate on strategy … there are a lot fewer loose balls than I remember from my days of box lacrosse at age 10!

The redeemable coupons can be exchanged for tickets for any game, but there are no guarantees regarding just what seats you will get. Still, if you would like to plan an outing for four, rather than just a pair, let me know and … you might get two ‘real’ tickets and the two coupons!

The play-off game? There’s no guarantee that there will be one, but you could always cross your fingers and ask for them.

To try your luck at receiving a pair of tickets, just eMail me or comment on this post.

Issue Comments

IAG To Vote On Holdco / Opco Structure

p>Industrial Alliance Insurance and Financial Services Inc. has announced (emphasis added):

that, following its February 5, 2018 announcement of its intention to create a holding company, it has entered into an arrangement agreement (the “Arrangement Agreement”) with a newly created entity, iA Financial Corporation Inc. (“iAFC”), and that its Board of Directors is unanimously recommending that common shareholders vote in favour of a plan of arrangement (the “Plan of Arrangement”) that, upon completion, would result in iAFC becoming a holding company as well as the parent corporation of the Company.

The purpose of the arrangement transaction (the “Arrangement”) is to adapt the Company’s legal and corporate structure to the group’s current size, allow greater financial and, commercial flexibility in pursuing its growth strategy and better reflect the diversification of its business. It will also provide the Company with a corporate structure that is as flexible as and substantially similar to that of its principal competitors.

In recommending that common shareholders vote in favour of the Plan of Arrangement, the Board of Directors considered and relied on, among other factors, an opinion received from National Bank Financial Inc. to the effect that, subject to the assumptions, limitations and qualifications set out in such opinion, the proposed Arrangement is fair, from a financial point of view, to the Company’s common shareholders.

Under the Plan of Arrangement, the existing assets and liabilities of the Company would, immediately following the Arrangement, remain with the Company, and iAFC would own all of the outstanding common shares of the Company. Common shareholders of the Company would become common shareholders of the new publicly-traded iAFC. Upon shareholder, Court and all statutory and regulatory approvals having been obtained and the subsequent effectiveness of the Plan of Arrangement, the Company’s common shares would be exchanged for common shares of iAFC, on a one-to-one basis, and shareholders would not be required to take any action for the exchange of shares.

Holders of the Company’s then publicly issued and outstanding preferred shares (collectively, the “Preferred Shares”) will remain holders of the Company’s Preferred Shares, and holders of the Company’s then publicly issued and outstanding debentures (collectively, the “Debentures”) will remain holders of Debentures of the Company. The Arrangement Agreement provides as a condition, among others, that iAFC must sign and deliver unconditional and irrevocable guarantees with respect to the Company’s payment obligations on the outstanding Preferred Shares and Debentures.

Further details of the Arrangement will be included in the Company’s Management Proxy Circular (the “Circular”) for the 2018 Annual Meeting of Shareholders and Participating Policyholders to be combined with a Special Meeting of Shareholders to consider the Arrangement that will be held on May 10, 2018 (the “Meeting”), which Circular is expected to be mailed to shareholders in early April. Assuming shareholder approval, the Arrangement would become effective following the Meeting, pending the approval and sanction of the Arrangement by the Superior Court of Quebec (the “Court”) and the authorization of the minister of Finance (Québec) following a report in respect thereof by the Autorité des marchés financiers (Québec) under the applicable provisions of the Act respecting insurance (Québec). It is currently anticipated that the Company will be filing the relevant materials with a view to obtaining an Interim Order from the Court for the Arrangement and the Meeting in the coming weeks.

In addition, the Company notes that it has tabled a private bill with the National Assembly of Quebec, the purpose of which is to specifically permit the Company to proceed with the Arrangement notwithstanding the existing provision in the special statute governing it that prohibits any person (together with its associates) from acquiring, directly or indirectly, voting shares representing 10% or more of the voting rights attached to such shares (the “10% Voting and Ownership Limitation”) and, following which the 10% Voting and Ownership Limitation would apply at the level of iAFC as the new parent and publicly traded holding company. As tabled, the private bill also contemplates that it shall be prohibited for any person to proceed with a transaction as a result of which, following the Arrangement, iAFC would cease to hold, directly or indirectly, 100% of the voting rights attached to the Company’s voting shares.

Norton Rose Fulbright is acting as external legal advisors to the Company with respect to the Arrangement.

I’m very pleased to see that the preferred shares will remain at the operating level – it’s always better to be closer to the money! Structural subordination can, on occasion, be deemed by the Credit Rating Agencies to be worth a notch of credit.

Affected issues are IAG.PR.A and IAG.PR.G, as well as the new issue announced today.

Of Interest