The Bank of Canada today maintained its target for the overnight rate at 1 ¾ per cent. The Bank Rate is correspondingly 2 per cent and the deposit rate is 1 ½ per cent.
The global economic expansion is moderating largely as expected, but signs are emerging that trade conflicts are weighing more heavily on global demand. Recent encouraging developments at the G20 meetings are a reminder that there are upside as well as downside risks around trade policy. Growth in major advanced economies has slowed, although activity in the United States remains above potential.
Oil prices have fallen sharply since the October Monetary Policy Report (MPR), reflecting a combination of geopolitical developments, uncertainty about global growth prospects, and expansion of U.S. shale oil production. Benchmarks for western Canadian oil – both heavy and, more recently, light – have been pulled down even further by transportation constraints and a buildup of inventories. In light of these developments and associated cutbacks in production, activity in Canada’s energy sector will likely be materially weaker than expected.
The Canadian economy as a whole grew in line with the Bank’s projection in the third quarter, although data suggest less momentum going into the fourth quarter. Business investment fell in the third quarter, in large part due to heightened trade uncertainty during the summer. Business investment outside the energy sector is expected to strengthen with the signing of the USMCA, new federal government tax measures, and ongoing capacity constraints. Along with strong foreign demand, this increase in productive capacity should support continued growth in exports.
Household credit and regional housing markets appear to be stabilizing following a significant slowdown in recent quarters. The Bank continues to monitor the impact on both builders and buyers of tighter mortgage rules, regional housing policy changes, and higher interest rates.
Inflation has been evolving as expected and the Bank’s core measures are all tracking 2 per cent, consistent with an economy that has been operating close to its capacity. CPI inflation, at 2.4 per cent in October, is just above target but is expected to ease in coming months by more than the Bank had previously forecast, due to lower gasoline prices. Downward historical revisions by Statistics Canada to GDP, together with recent macroeconomic developments, indicate there may be additional room for non-inflationary growth. The Bank will reassess all of these factors in its new projection for the January MPR.
Weighing all of these developments, Governing Council continues to judge that the policy interest rate will need to rise into a neutral range to achieve the inflation target. The appropriate pace of rate increases will depend on a number of factors. These include the effect of higher interest rates on consumption and housing, and global trade policy developments. The persistence of the oil price shock, the evolution of business investment, and the Bank’s assessment of the economy’s capacity will also factor importantly into our decisions about the future stance of monetary policy.
So they’re still saying that the policy rate will rise, but there is a significant note of caution about how soon it will be. It’s a pity, of course, that the press release does not report the voting results and the reason for any dissents there might be, but Canadian policy makers are not brave enough to take a public stand contrary to consensus. Maybe we need better quality policy makers.
Assiduous Readers will remember that ICS 2.0 is the critical standard relating to (among many other things) loss absorbency of preferred shares and therefore Deemed Maturities.
Money came into the Canadian bond market, with the Government of Canada 5-year yield (GOC-5) falling 6bp to 2.08%. And so …
… the Canadian preferred share market was hammered big-time today.
PerpetualDiscounts now yield 5.94% (!), equivalent to 7.72% at the standard equivalency factor of 1.3x. Long corporates now yield about 4.10%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 360bp (!), a significant widening from the 350bp reported November 28.
Performance Highlights |
Issue |
Index |
Change |
Notes |
NA.PR.S |
FixedReset Disc |
-5.76 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 19.48
Evaluated at bid price : 19.48
Bid-YTW : 5.97 % |
BAM.PR.K |
Floater |
-5.01 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 13.83
Evaluated at bid price : 13.83
Bid-YTW : 5.08 % |
BAM.PR.C |
Floater |
-4.76 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 13.80
Evaluated at bid price : 13.80
Bid-YTW : 5.09 % |
CM.PR.P |
FixedReset Disc |
-4.25 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 19.16
Evaluated at bid price : 19.16
Bid-YTW : 5.81 % |
MFC.PR.K |
FixedReset Ins Non |
-4.23 % |
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.26
Bid-YTW : 9.44 % |
BAM.PR.Z |
FixedReset Disc |
-4.14 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 19.90
Evaluated at bid price : 19.90
Bid-YTW : 6.46 % |
TRP.PR.D |
FixedReset Disc |
-4.12 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 17.23
Evaluated at bid price : 17.23
Bid-YTW : 6.75 % |
CM.PR.Q |
FixedReset Disc |
-4.11 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 21.01
Evaluated at bid price : 21.01
Bid-YTW : 5.83 % |
MFC.PR.L |
FixedReset Ins Non |
-4.07 % |
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.92
Bid-YTW : 10.77 % |
TD.PF.B |
FixedReset Disc |
-3.97 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 19.60
Evaluated at bid price : 19.60
Bid-YTW : 5.76 % |
BAM.PF.E |
FixedReset Disc |
-3.78 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 18.60
Evaluated at bid price : 18.60
Bid-YTW : 6.48 % |
CM.PR.R |
FixedReset Disc |
-3.71 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 22.29
Evaluated at bid price : 22.87
Bid-YTW : 5.85 % |
TRP.PR.C |
FixedReset Disc |
-3.67 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 13.63
Evaluated at bid price : 13.63
Bid-YTW : 6.59 % |
BAM.PF.A |
FixedReset Disc |
-3.57 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 20.25
Evaluated at bid price : 20.25
Bid-YTW : 6.42 % |
IFC.PR.A |
FixedReset Ins Non |
-3.57 % |
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.02
Bid-YTW : 10.99 % |
BAM.PR.T |
FixedReset Disc |
-3.54 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 16.89
Evaluated at bid price : 16.89
Bid-YTW : 6.46 % |
BAM.PR.B |
Floater |
-3.50 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 13.80
Evaluated at bid price : 13.80
Bid-YTW : 5.09 % |
BAM.PF.B |
FixedReset Disc |
-3.43 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 19.15
Evaluated at bid price : 19.15
Bid-YTW : 6.42 % |
BAM.PF.F |
FixedReset Disc |
-3.16 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 19.63
Evaluated at bid price : 19.63
Bid-YTW : 6.56 % |
BMO.PR.S |
FixedReset Disc |
-3.15 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 20.00
Evaluated at bid price : 20.00
Bid-YTW : 5.71 % |
BAM.PR.R |
FixedReset Disc |
-3.08 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 16.70
Evaluated at bid price : 16.70
Bid-YTW : 6.50 % |
MFC.PR.Q |
FixedReset Ins Non |
-2.99 % |
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.50
Bid-YTW : 9.54 % |
BMO.PR.W |
FixedReset Disc |
-2.91 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 19.66
Evaluated at bid price : 19.66
Bid-YTW : 5.64 % |
MFC.PR.N |
FixedReset Ins Non |
-2.81 % |
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.35
Bid-YTW : 10.32 % |
BMO.PR.Y |
FixedReset Disc |
-2.77 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 21.08
Evaluated at bid price : 21.08
Bid-YTW : 5.75 % |
TD.PF.C |
FixedReset Disc |
-2.72 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 19.70
Evaluated at bid price : 19.70
Bid-YTW : 5.67 % |
NA.PR.W |
FixedReset Disc |
-2.67 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 18.92
Evaluated at bid price : 18.92
Bid-YTW : 5.91 % |
MFC.PR.M |
FixedReset Ins Non |
-2.67 % |
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.59
Bid-YTW : 10.18 % |
HSE.PR.C |
FixedReset Disc |
-2.67 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 18.98
Evaluated at bid price : 18.98
Bid-YTW : 6.97 % |
MFC.PR.F |
FixedReset Ins Non |
-2.58 % |
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 15.10
Bid-YTW : 12.33 % |
RY.PR.H |
FixedReset Disc |
-2.55 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 20.22
Evaluated at bid price : 20.22
Bid-YTW : 5.55 % |
SLF.PR.G |
FixedReset Ins Non |
-2.47 % |
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.58
Bid-YTW : 10.90 % |
BAM.PF.G |
FixedReset Disc |
-2.38 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 19.70
Evaluated at bid price : 19.70
Bid-YTW : 6.47 % |
TD.PF.A |
FixedReset Disc |
-2.33 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 20.10
Evaluated at bid price : 20.10
Bid-YTW : 5.57 % |
SLF.PR.J |
FloatingReset |
-2.31 % |
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.52
Bid-YTW : 10.74 % |
MFC.PR.J |
FixedReset Ins Non |
-2.29 % |
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.90
Bid-YTW : 8.27 % |
BIP.PR.E |
FixedReset Disc |
-2.26 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 20.72
Evaluated at bid price : 20.72
Bid-YTW : 6.24 % |
TD.PF.D |
FixedReset Disc |
-2.16 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 21.25
Evaluated at bid price : 21.25
Bid-YTW : 5.79 % |
HSE.PR.E |
FixedReset Disc |
-2.14 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 20.11
Evaluated at bid price : 20.11
Bid-YTW : 7.06 % |
PWF.PR.A |
Floater |
-2.12 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 18.01
Evaluated at bid price : 18.01
Bid-YTW : 3.86 % |
BMO.PR.T |
FixedReset Disc |
-2.10 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 19.58
Evaluated at bid price : 19.58
Bid-YTW : 5.71 % |
IFC.PR.C |
FixedReset Ins Non |
-2.09 % |
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.64
Bid-YTW : 8.88 % |
MFC.PR.R |
FixedReset Ins Non |
-2.04 % |
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-03-19
Maturity Price : 25.00
Evaluated at bid price : 24.05
Bid-YTW : 6.12 % |
RY.PR.Z |
FixedReset Disc |
-2.03 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 20.24
Evaluated at bid price : 20.24
Bid-YTW : 5.50 % |
CM.PR.S |
FixedReset Disc |
-1.97 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 20.35
Evaluated at bid price : 20.35
Bid-YTW : 5.75 % |
NA.PR.C |
FixedReset Disc |
-1.96 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 22.07
Evaluated at bid price : 22.55
Bid-YTW : 5.98 % |
EMA.PR.H |
FixedReset Disc |
-1.88 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 22.56
Evaluated at bid price : 23.50
Bid-YTW : 5.21 % |
TD.PF.E |
FixedReset Disc |
-1.85 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 21.38
Evaluated at bid price : 21.70
Bid-YTW : 5.73 % |
HSE.PR.G |
FixedReset Disc |
-1.79 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 20.33
Evaluated at bid price : 20.33
Bid-YTW : 6.94 % |
TRP.PR.A |
FixedReset Disc |
-1.72 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 15.39
Evaluated at bid price : 15.39
Bid-YTW : 6.65 % |
MFC.PR.I |
FixedReset Ins Non |
-1.71 % |
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.64
Bid-YTW : 8.29 % |
IFC.PR.E |
Deemed-Retractible |
-1.70 % |
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.02
Bid-YTW : 7.93 % |
TRP.PR.B |
FixedReset Disc |
-1.61 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 12.85
Evaluated at bid price : 12.85
Bid-YTW : 6.57 % |
BIP.PR.F |
FixedReset Disc |
-1.59 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 21.38
Evaluated at bid price : 21.65
Bid-YTW : 5.91 % |
RY.PR.S |
FixedReset Disc |
-1.54 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 21.93
Evaluated at bid price : 22.45
Bid-YTW : 5.21 % |
RY.PR.M |
FixedReset Disc |
-1.52 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 20.80
Evaluated at bid price : 20.80
Bid-YTW : 5.69 % |
PVS.PR.D |
SplitShare |
-1.49 % |
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2021-10-08
Maturity Price : 25.00
Evaluated at bid price : 24.38
Bid-YTW : 5.47 % |
W.PR.K |
FixedReset Prem |
-1.46 % |
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-01-15
Maturity Price : 25.00
Evaluated at bid price : 25.01
Bid-YTW : 5.63 % |
RY.PR.J |
FixedReset Disc |
-1.41 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 21.35
Evaluated at bid price : 21.65
Bid-YTW : 5.62 % |
EMA.PR.F |
FixedReset Disc |
-1.40 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 18.98
Evaluated at bid price : 18.98
Bid-YTW : 6.39 % |
CM.PR.O |
FixedReset Disc |
-1.39 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 19.90
Evaluated at bid price : 19.90
Bid-YTW : 5.73 % |
TRP.PR.K |
FixedReset Disc |
-1.33 % |
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-05-31
Maturity Price : 25.00
Evaluated at bid price : 24.52
Bid-YTW : 5.57 % |
BIP.PR.A |
FixedReset Disc |
-1.28 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 20.00
Evaluated at bid price : 20.00
Bid-YTW : 7.08 % |
W.PR.M |
FixedReset Prem |
-1.27 % |
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-10-15
Maturity Price : 25.00
Evaluated at bid price : 24.85
Bid-YTW : 5.75 % |
CU.PR.D |
Perpetual-Discount |
-1.26 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 21.20
Evaluated at bid price : 21.20
Bid-YTW : 5.83 % |
NA.PR.E |
FixedReset Disc |
-1.22 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 20.25
Evaluated at bid price : 20.25
Bid-YTW : 5.92 % |
GWO.PR.H |
Deemed-Retractible |
-1.20 % |
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.50
Bid-YTW : 8.66 % |
TRP.PR.J |
FixedReset Prem |
-1.18 % |
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-05-31
Maturity Price : 25.00
Evaluated at bid price : 25.15
Bid-YTW : 5.30 % |
PWF.PR.Q |
FloatingReset |
-1.15 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 18.04
Evaluated at bid price : 18.04
Bid-YTW : 4.62 % |
PWF.PR.Z |
Perpetual-Discount |
-1.15 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 21.51
Evaluated at bid price : 21.51
Bid-YTW : 6.07 % |
SLF.PR.H |
FixedReset Ins Non |
-1.12 % |
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.60
Bid-YTW : 9.14 % |
IAG.PR.G |
FixedReset Ins Non |
-1.10 % |
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.65
Bid-YTW : 7.89 % |
PWF.PR.T |
FixedReset Disc |
-1.10 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 21.38
Evaluated at bid price : 21.65
Bid-YTW : 5.34 % |
BMO.PR.E |
FixedReset Disc |
-1.07 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 22.31
Evaluated at bid price : 23.05
Bid-YTW : 5.36 % |
POW.PR.D |
Perpetual-Discount |
-1.07 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 21.24
Evaluated at bid price : 21.24
Bid-YTW : 5.99 % |
TD.PF.I |
FixedReset Disc |
-1.06 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 22.57
Evaluated at bid price : 23.40
Bid-YTW : 5.42 % |
MFC.PR.B |
Deemed-Retractible |
-1.01 % |
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.60
Bid-YTW : 9.36 % |
GWO.PR.Q |
Deemed-Retractible |
-1.01 % |
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.60
Bid-YTW : 7.96 % |
BAM.PF.I |
FixedReset Disc |
-1.00 % |
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-03-31
Maturity Price : 25.00
Evaluated at bid price : 24.70
Bid-YTW : 5.53 % |
TRP.PR.F |
FloatingReset |
1.09 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 15.72
Evaluated at bid price : 15.72
Bid-YTW : 5.76 % |
W.PR.H |
Perpetual-Discount |
1.37 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-12-05
Maturity Price : 23.48
Evaluated at bid price : 23.75
Bid-YTW : 5.87 % |
ALA.PR.E : Convert or Hold?
December 10th, 2018It will be recalled that ALA.PR.E will reset at 5.393% effective December 31, 2018.
ALA.PR.E is a FixedReset, 5.00%+317, that commenced trading 2013-12-13 after being announced 2013-12-4. The 2018-11-28 notice of extension was reported on PrefBlog. The issue is tracked by HIMIPref™ but is relegated to the Scraps – FixedReset Discount subindex due to credit concerns.
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., ALA.PR.E and the FloatingReset 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 more interested in floating rate product than usual; the implied rates until the next interconversion are above the current 3-month bill rate as the averages for investment-grade and junk issues are at +2.10% and +1.62%, respectively. 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 ALA.PR.E FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:
Price if Implied Bill
is equal to
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, ALA.PR.E. Therefore I recommend that holders of ALA.PR.E 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.
Those who wish to convert anyway are advised that the deadline for notifying the company of such a desire is 5:00 p.m. (Toronto time) on December 17, 2018. Brokers and other intermediaries generally set their internal deadlines a day or two in advance of this date, so if you wish to convert there’s not much time to waste! Note that brokers will, in general, try to execute the instruction on a ‘best efforts’ basis if received between the two deadlines, provided that the procrastinating shareholder grovels entertainingly enough.
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