Yield Differences on Weston Issues

Prefblog’s prettiest Assiduous Reader wrote in pointing out that there’s a huge difference in yields among Weston’s perpetual issues … and I thought that would be an interesting topic.

Weston Issues pre-Tax bid-YTW
Issue Annual
WN.PR.A 1.45 19.16-28 7.62%
WN.PR.C 1.30 17.89-07 7.44%
WN.PR.D 1.30 18.27-30 7.28%
WN.PR.E 1.1875 16.46-53 7.39%

This is, indeed, quite the spread – 34bp between WN.PR.A & WN.PR.D is something that would normally be arbtraged away very quickly for actively traded issues of the same name … for example

Yield Spreads of
Perpetual Discount Issues
of the Same Name
BNS Pfd-1 6bp
CM Pfd-1 11bp
ELF Pfd-2(low) 3bp
GWO Pfd-1(low) 11bp
LB Pfd-3 12bp
MFC Pfd-1(low) 1bp
NA Pfd-1(low) 26bp
POW Pfd-2(high) 14bp
PWF Pfd-1(low) 17bp
RY Pfd-1 11bp
SLF Pfd-1(low) 9bp
TD Pfd-1 6bp
W Pfd-2(low) 17bp

Note that the NA spread is probably influenced by proximity to call price of the higher yielding instrument – this added complexity does not exist for poor old Weston.

It should be noted that Weston is on Credit Review Negative by DBRS; I am advised that one factor in non-arbitrage of yield is that some institutional holders know very well that there is an opportunity, but are not empowered to take advantage of it. They bought WN when it was investment-grade; they have decided to keep the name despite the downgrade; but they cannot buy non-investment-grade issues; therefore they cannot execute a swap.

Update: I have uploaded graphs of the absolute Yields-to-Worst and of the differences thereof for your viewing pleasure.

6 Responses to “Yield Differences on Weston Issues”

  1. prefhound says:

    Weston Prefs are currently rated Pfd-3-Hi by DBRS. A one notch downgrade would take them to Pfd-3; two notches to Pfd-3-Lo. All these are still called investment grade by DBRS (not withstanding James’ preference to consider them “equity-like”).
    Therefore, I don’t quite see the constraint on arbitraging institutions.
    I could suggest that 34 bp spread on Weston issues is about 4-5%, while 16 bp spreads on some other issues yielding 5.4% would be about 3% — not as far out of line in percentage terms as in bp.
    Also, one just has to look at the spread on BNA.PR.ABC, which is 120 bp or more or 20% in relative terms, to realize that jangled nerves and falling prices (especially during tax loss selling season) can give rise to significant spreads.

  2. jiHymas says:

    Can’t agree about the percentage price difference – modified duration of the perps is pretty well behaved, varying from about 12.75 to 15.00. Say the Westons are all at 12.5 (I haven’t checked this), then 34 bp comes to 4.25% in price.

    If we say that 16bp spread exists on a 15.00 year duration instrument, that’s 2.40% on price … and 16bp is clearly on the very high end of normal.

    Remember, I’m a bond guy – maybe that’s why I’m so impressed by this. I spend all my life worrying about whether you need 5bp yield pickup to go from a barbell to a bullet, or if you really need 6bp … seeing a 34bp spread on functionally identical instruments is rather breathtaking.

    And don’t bring the BNA issues into this! They’re just WIERD!

    Well, maybe YOU don’t see the constraint on arbitraging institutions, and maybe I don’t see the constraint on arbitraging institutions, but Investment Policy Documents can be very strange things. I have no difficulty at all accepting such bizarre constraints as at least a partial explanation of the situation.

  3. prefhound says:

    Perhaps you weren’t understanding my % of interest rate comments. I did not mean relative to duration, which is not too different in this case, but spread/interest rate (e.g. 34 bp / 7.4%).
    I find many interest rate changes are proportional to interest rates, not additive as indicated by a spread measured by difference.
    Just as ln[Price] is a better behaved description of stock volatility and range, so is ln[Interest Rate]. Interest rates, like stock prices, also cannot go negative. The stability, or riskiness of an interest rate is often proportional to the interest rate (e.g. Treasury rates at low rates are less volatile (in bp) than treasury rates at higher rates, but similar in bp/interest rates)

  4. jiHymas says:


    Thanks for the clarification!

  5. jiHymas says:

    An Anonymous Assiduous Reader has advised:

    fyi -to ur blog commentor – P3 is not considered investment grade by many corps – regardless of the equivalent bond rating which may be investment grade.
    this is why u can guarantee a weak institutional book on new issues that have a P3 rating (even if it’s split P3/P2) – most of that goes to retail.
    retail does recommend P3 – sometimes our retail grp recommends p4….

    hedge funds don’t care but they only buy prefs when it’s a special situtaion that they can hedge &/or make 20+%

  6. […] So not only do we have the slope of the yields being in the wrong direction (see my articles on Convexity and Perpetual Hockey Sticks) but … doesn’t the spread seem a little … er … extreme to anybody? It’s almost as much as the spread on Westons that attracted comment last year! […]

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