I’m not entirely sure that this is the first time it’s happened, because I don’t keep track of such things … but at the very least, it’s one of the first times this has happened!
RY.PR.R is a 6.25%+450 FixedReset, announced 2009-1-21. It is callable 2014-2-24 at par and was most recently mentioned in the volume highlights for 2010-3-22.
It traded 5,593 shares today in a range of 28.24-43 before closing at 28.31-40, 20×35.
HIMIPref™ reports that the yield to a call 2014-3-26 at par is now 2.93% (pre-tax, bond-equivalent); recall that a slight inaccuracy in HIMIPref™ conventions means that the calculated call date is maturityNoticePeriod days after the actual call date.
That’s a pretty low yield! The reset to +450bp makes it almost certain to be called at the first opportunity, but one of the words that can hurt in the investment game is “almost”!
I have uploaded two charts for your edification and amusement:
RY.PR.R was last mentioned on PrefBlog (other than in routine reports) when it was added to TXPR in July 2009. It is tracked by HIMIPref™ and is a member of the FixedReset index.
[…] note that James Hymas has observed that an issue of Royal Bank preferred shares (essentially a fixed rate coupon of 6.25% […]
What is interesting about this (to me at least) is that even at this yield, RY.PR.R has a superior after-tax return for most Ontario investors, ranging from 25 to 125 bp over a 4 year GIC yielding 3%. If we want to look for the bottom, it may not be found until GIC after-tax rates are reached — even if the credit risk is substantially greater.
I estimate the probability of call at the reset date is 97 +/- 2% assuming reset pref yield mean reversion to 4.75% +/- 0.25%.
According to pfin.ca and interpolating between two RY bonds, a 4-year RY bond would yield about 3%. Not much credit risk there either!
It’s more appropriate to use Tier 1 issues as benchmarks. The TRuCS-2013, coupon 5.812, convertible into prefs 2013-12-31 yield 3.50 to the Dec. 31, 2013 call; the TRuCS-2015, coupon 4.87%, with a step-down 2015-12-31 into 6-month BAs+150, yield 4.05% to the Dec 31, 2015 call.
Still, your point is well taken – for a taxable investor, these still look at least marginally cheap to other tiers of debt.
[…] As discussed in February, the impressive returns of the past year cannot continue indefinately. The long term return on a fixed income instrument is its yield – 6.2% for a PerpetualDiscount, and about 3.6% to the call date for a FixedReset, as of April 1. The FixedReset index set a new low yield in March, highlighted by RY.PR.R’s brief flirtation with sub-3% levels. […]
[…] four months ago, on March 26, I noted that RY.PR.R was bid at under 3.00%. It turns out that that was a significant date: March 26 marked a peak in the FixedReset market, […]
[…] four months ago, on March 26, I noted that RY.PR.R was bid at under 3.00%. It turns out that that was a significant date: March 26 marked a peak in the FixedReset market, […]