PrefBlog

There was rather an alarming headline, but a story in the Globe made some important points about junk:

Still, demand for these [junk bond] deals has quickly escalated after a decade of inactivity, and 13 new Canadian offerings worth over $3-billion ultimately hit the market in 2010.
…
In theory, [Barry Allan, who runs Marret Asset Management] said, 100 per cent of the volatility in the price of a government bond stems from interest rate movements. (Though, sovereign risk is now toying with that assumption.) Investment-grade bonds fluctuate in a similar fashion, with 80 per cent of price movements related to interest rates.

In contrast, only 20 per cent of movements in the prices of high-yield debt are tied to interest rates.
…
The sector is hot in Canada because income trusts have all but disappeared, said Greg Woynarski, co-head of fixed income at Scotia Capital, which now has five people dedicated to high-yield products. “Debt is becoming the new equity.”

Back when trusts yielded 5 to 8 per cent in annual distributions, they effectively served the same function for income-seeking investors that high-yield debt does today.

It was a day of average volume on the Canadian preferred share market, with PerpetualDiscounts gaining 14bp and FixedResets won 6bp. As a result the Bozo Spread (Current Yield PerpetualDiscounts less Current Yield FixedResets) has gone negative – not necessarily a death knell for my conjecture that retail evaluates the relative attractiveness of these classes by comparing Current Yields, but it does make it more complex: the indices will have to be disaggregated to make it work (i.e., compare RY-RY, or TD-TD, not index-index).

This entry was posted on Thursday, February 3rd, 2011 at 11:32 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.