February 17, 2011

There’s an interesting claim of regime switching in stock-bond correlations:

Based on his analysis of data over the past 20 years, the tipping point is a yield of about 4 per cent.

When the 10-year government bond yield is below that threshold, bond yields and the S&P/TSX composite index tend to move together, with a positive correlation of 0.49, strategist with UBS Securities Canada] Mr. [George] Vasic found. That’s to be expected, because very low bond yields are usually associated with sluggish or recessionary conditions, and when the economy starts to improve, yields and stocks both rise.

However, when bond yields are between 4 per cent and 6 per cent, stocks and bond yields tend to move in opposite directions, with a correlation of negative 0.56. In other words, when yields are already high and climbing, the stock market starts to feel the brunt of rising interest rates. (A correlation of 1 represents a perfect positive relationship, while negative 1 indicates a perfect inverse relationship.)

One thing that is well known is that correlation signs reverse in times of financial stress; it’s unclear whether this is anything new.

Prices slid somewhat in the Canadian preferred share market today, with PerpetualDiscounts down 7bp, FixedResets losing 6bp and DeemedRetractibles off 8bp. Volatility was low, with only one issue in the Performance highlights. Volume was heavy.

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 -0.0476 % 2,397.3
FixedFloater 4.73 % 3.44 % 16,753 19.13 1 0.0000 % 3,600.1
Floater 2.50 % 2.26 % 48,511 21.58 4 -0.0476 % 2,588.5
OpRet 4.82 % 3.70 % 60,009 2.22 8 -0.0579 % 2,389.9
SplitShare 5.35 % 0.78 % 270,715 0.81 4 -0.0940 % 2,467.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0579 % 2,185.3
Perpetual-Premium 5.74 % 5.51 % 122,037 1.08 9 0.1214 % 2,034.8
Perpetual-Discount 5.55 % 5.62 % 129,236 14.35 15 -0.0708 % 2,107.8
FixedReset 5.24 % 3.77 % 180,063 3.03 54 -0.0631 % 2,260.8
Deemed-Retractible 5.20 % 5.26 % 396,341 8.26 53 -0.0799 % 2,084.7
Performance Highlights
Issue Index Change Notes
PWF.PR.I Perpetual-Premium 1.03 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-05-30
Maturity Price : 25.25
Evaluated at bid price : 25.45
Bid-YTW : 4.17 %
Volume Highlights
Issue Index Shares
Traded
Notes
BAM.PR.B Floater 114,005 Desjardins crossed 45,000 at 18.97, then sold 50,000 to CIBC at 18.98.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-17
Maturity Price : 18.95
Evaluated at bid price : 18.95
Bid-YTW : 2.79 %
RY.PR.I FixedReset 79,945 TD crossed blocks of 20,000 and 49,700, both at 25.95.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 25.95
Bid-YTW : 3.66 %
BAM.PR.M Perpetual-Discount 69,545 Desjardins crossed blocks of 23,500 and 35,000, both at 21.25.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-17
Maturity Price : 21.26
Evaluated at bid price : 21.26
Bid-YTW : 5.68 %
BNS.PR.M Deemed-Retractible 63,671 TD crossed 25,000 at 24.02; RBC crossed the same number at the same price.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.01
Bid-YTW : 5.03 %
SLF.PR.A Deemed-Retractible 56,567 Desjardins crossed 45,000 at 23.75.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.69
Bid-YTW : 5.50 %
RY.PR.F Deemed-Retractible 49,700 TD crossed 39,200 at 23.85.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.82
Bid-YTW : 5.04 %
There were 51 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BAM.PR.H OpRet Quote: 25.27 – 25.90
Spot Rate : 0.6300
Average : 0.4569

YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2012-03-30
Maturity Price : 25.00
Evaluated at bid price : 25.27
Bid-YTW : 5.47 %

ELF.PR.F Deemed-Retractible Quote: 22.45 – 22.92
Spot Rate : 0.4700
Average : 0.3352

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.45
Bid-YTW : 6.74 %

BAM.PR.J OpRet Quote: 26.80 – 27.00
Spot Rate : 0.2000
Average : 0.1327

YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2018-03-30
Maturity Price : 25.00
Evaluated at bid price : 26.80
Bid-YTW : 4.36 %

BAM.PR.R FixedReset Quote: 25.80 – 26.14
Spot Rate : 0.3400
Average : 0.2794

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-07-30
Maturity Price : 25.00
Evaluated at bid price : 25.80
Bid-YTW : 4.89 %

PWF.PR.M FixedReset Quote: 26.71 – 27.00
Spot Rate : 0.2900
Average : 0.2352

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-02
Maturity Price : 25.00
Evaluated at bid price : 26.71
Bid-YTW : 3.71 %

POW.PR.D Perpetual-Discount Quote: 23.00 – 23.24
Spot Rate : 0.2400
Average : 0.1855

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-17
Maturity Price : 22.79
Evaluated at bid price : 23.00
Bid-YTW : 5.49 %

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