Assiduous Reader madequota has asked on another post:
OK, one more question that’s easy to ask, and hard to answer:
In very general terms, I’ve always believed that prefs (of the so-called perp variety especially) should behave, more or less, in sync with the 30 year bond. I’m aware of the variety of specific differences between the two vehicles, but at the end of the day, these two investments are very similar in that the occurances of the daily market should have identical impact on both of them. Hence they should, at the very least, move in the same direction.
Assuming my generalization is correct, why then do these things trade so often in opposite directions? For example, the US retail number came out today, and because it was marginally “better than analyst’s expectations”, bonds got punished both in the US and Canada. But the prefs had a great day in Canada.
Specifically then, why is the long bond getting creamed over the past week, while at the same time, thirst for perp prefs seems to be unquenchable?
madequota
I am on the verge of doing serious work on spreads … though what I am calling “serious work” is what I would normally term as a product of the “Look, Mummy, I got a spreadsheet!” school of security analysis.
One more month and I should have the HIMIPref™ indices up to date, which will give the data I require to draw long term spread graphs. PerpetualDiscounts SHOULD trade like long corporates (NOT long Canadas!), PerpetualPremiums, Retractibles & OpRets SHOULD trade like short corporates – the first of these with a little slippage due to negative convexity.
All I can really say is: spreads are volatile. And without some hot institutional money (even lukewarm institutional would be a help) to arbitrage corporates/prefs, they’re going to stay volatile.
Note that long corporates are down about 2.52% YTD, while perpetualDiscounts are up about 2.67%. So go figure.
I hear what you’re saying about the institutional factor. It’s a definite reality of this market.
Interesting sidebar to the idea that perpdiscs should trade like long corporates. Over the past year, we’ve seen a number of corporate plays that have been pref-favourable, due to the accompanying pref share redemption, but at the same time, bond unfavourable, due to the introduction of increased debt to the acquired company, and the inevitable existing bond downgrade.
Recent examples would be CP (although the takeover didn’t pan out), Loblaws, Transalta, and the mother of all bond fiascos, BCE.
Maybe this explains to some degree, the reality that long corporates are down, while perpdiscs are up. Investors are just seeing far too much risk in this kind of bond.
madequota
Mutual Fund Follies
I draw your attention to this exerpt from a newswire item that was just released (2/15 @ 12:20PM):
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” REUTERS Canadian mutual fund sales plunge 88 pct in Jan [HPNSPTS]
TORONTO, Feb 15 (Reuters) – Canadian investors bought a net C$460.5 million ($460.5 million) worth of mutual funds in January, a fraction of the amount purchased in January 2007, and buyers parked their money in short-term funds, an industry group said on Friday.
Canadians actually pulled C$4.35 billion out of long-term mutual funds while sinking C$4.81 billion into money market funds, the Investment Funds Institute of Canada said in a monthly release. ”
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I’m presuming “money market funds” do not invest in bonds, pref shares, etc., but instead include GIC’s, T-Bills, etc. Correct me if I’m wrong with that presumption, but if correct, could this be a contributing factor to RBC’s insessent presence in the market as a pref share clearing house? Mutual fund investors simply pulling out of the market, forcing the funds to liquidate in order to redeem these investors? Sounds like too basic an explanation, but possibly a factor here?
madequota
Your presumption is correct – “Money Market Funds” is a defined term, and we can rely on IFIC to use this defined term in an approved manner. There are fearsome restrictions on their investments and average term which must be followed if the funds are to be allowed to use the words “Money Market” in their name.
This was (and, for all I know, still is) one of the issues with the ABCP blow-up … extending the term of the paper to match liabilities would make the paper illegal for the current holders to hold, leading to forced sales and, presumably, large losses.
IFIC publishes their monthly reports. The detail for January ’08 shows that “Equity Dividend Funds” suffered net redemptions of $427-million.
It could very well be a factor – as I’ve stated before, I believe that retractions of DPS.UN had a major effect on the preferred share market in October.