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March 10, 2008

Written by

jiHymas

in

Bloomberg has a story headlined TIPS’ Yields Show Fed Has Lost Control of Inflation::

“The way TIPS are trading now, investors believe headline inflation will stay lofty and are willing to give up the real yield for that,” said Brian Brennan, a money manager who helps oversee $11 billion in fixed-income assets at T. Rowe Price Group Inc. based in Baltimore. Prices for the securities indicate “a real concern of a recession and high headline inflation,” he said.

This is the type of boneheaded analysis that is rife now that the smiley-boy salesmen have taken over the industry completely. If the driver of these real yields is inflation, then why is the 30-year Treasury bond yielding less than 4.5%?

As Accrued Interest points out, Treasury yields are being driven by fear, with investors piling into government guaranteed debt for the simple reason that they want to protect their capital. TIPS are simply maintaining a spread to nominals – an increasing spread, to be sure; inflation fears are part of the picture as I have previously discussed, but to ascribe the entire move to this is … boneheaded. Sorry folks, I just can’t think of any other word.

PerpetualDiscounts got smacked again today, on extremely light volume – all eyes, yet again, were on the equity markets and wondering if the music would stop with EVERYBODY holding the hot potato. BCE issues did very well – it appears that there are some who took the unsuccessful bondholders’ lawsuit a lot more seriously than I did.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 5.50% 5.52% 32,606 14.64 2 +0.8109% 1,088.6
Fixed-Floater 4.76% 5.57% 63,718 14.78 8 +1.1067% 1,043.2
Floater 4.72% 4.79% 86,094 15.78 2 +0.6984% 868.2
Op. Retract 4.84% 3.62% 73,774 2.74 15 -0.1461% 1,044.8
Split-Share 5.34% 5.68% 97,706 4.04 14 -0.2302% 1,030.2
Interest Bearing 6.21% 6.64% 67,951 4.22 3 -0.2713% 1,080.0
Perpetual-Premium 5.76% 5.63% 285,094 8.77 17 -0.0144% 1,022.8
Perpetual-Discount 5.46% 5.52% 263,316 14.62 51 -0.4534% 942.8
Major Price Changes
Issue Index Change Notes
FBS.PR.B SplitShare -2.5641% Asset coverage of just under 1.5:1 as of March 6, according TD Securities. Now with a pre-tax bid-YTW of 6.28% based on a bid of 9.50 and a hardMaturity 2011-12-15 at 10.00.
SLF.PR.D PerpetualDiscount -1.8310% Now with a pre-tax bid-YTW of 5.33% based on a bid of 20.91 and limitMaturity.
SLF.PR.A PerpetualDiscount -1.4286% Now with a pre-tax bid-YTW of 5.39% based on a bid of 22.08 and a limitMaturity.
BMO.PR.J PerpetualDiscount -1.4112% Now with a pre-tax bid-YTW of 5.61% based on a bid of 20.26 and a limitMaturity.
ELF.PR.F PerpetualDiscount -1.3453% Now with a pre-tax bid-YTW of 6.13% based on a bid of 22.00 and a limitMaturity. 
CM.PR.E PerpetualDiscount -1.3158% Now with a pre-tax bid-YTW of 5.91% based on a bid of 24.00 and a limitMaturity.
IAG.PR.A PerpetualDiscount -1.3133% Now with a pre-tax bid-YTW of 5.48% based on a bid of 21.04 and a limitMaturity.
RY.PR.C PerpetualDiscount -1.2471% Now with a pre-tax bid-YTW of 5.43% based on a bid of 21.38 and a limitMaturity.
BNS.PR.N PerpetualDiscount -1.2245% Now with a pre-tax bid-YTW of 5.49% based on a bid of 24.20 and a limitMaturity.
WFS.PR.A SplitShare -1.2036% Asset coverage of just under 1.8:1 as of February 29, according to Mulvihill. Now with a pre-tax bid-YTW of 6.14% based on a bid of 9.85 and a hardMaturity 2011-6-30 at 10.00.
RY.PR.G PerpetualDiscount -1.1699% Now with a pre-tax bid-YTW of 5.38% based on a bid of 21.12 and a limitMaturity.
CM.PR.H PerpetualDiscount -1.1628% Now with a pre-tax bid-YTW of 5.73% based on a bid of 21.25 and a limitMaturity. 
RY.PR.E PerpetualDiscount -1.1531% Now with a pre-tax bid-YTW of 5.30% based on a bid of 21.43 and a limitMaturity.
MFC.PR.A OpRet -1.1453% Now with a pre-tax bid-YTW of 4.09% based on a bid of 25.03 and a softMaturity 2015-12-18 at 25.00.
SLF.PR.C PerpetualDiscount -1.1268% Now with a pre-tax bid-YTW of 5.30% based on a bid of 21.06 and a limitMaturity.
BNS.PR.L PerpetualDiscount -1.0295% Now with a pre-tax bid-YTW of 5.40% based on a bid of 21.15 and a limitMaturity.
NA.PR.L PerpetualDiscount -1.0078% Now with a pre-tax bid-YTW of 5.66% based on a bid of 21.61 and a limitMaturity.
BCE.PR.A FixFloat +1.0417%  
BCE.PR.C FixFloat +1.0417%  
FTU.PR.A SplitShare +1.2360% Asset coverage of just under 1.5:1 as of February 29, according to the company. Probably a little under 1.4:1 now, given poor performance this month of US Financials. Now with a pre-tax bid-YTW of 7.88% based on a bid of 9.01 and a hardMaturity 2012-12-1 at 10.00.
BCE.PR.B FixFloat +1.6518%  
BCE.PR.G FixFloat +1.9108%  
BCE.PR.Z FixFloat +2.0408%  
BCE.PR.I FixFloat +2.0842%  
Volume Highlights
Issue Index Volume Notes
NA.PR.L PerpetualDiscount 51,515 TD crossed 48,300 at 21.75. Now with a pre-tax bid-YTW of 5.66% based on a bid of 21.61 and a limitMaturity.
BNS.PR.O PerpetualPremium 21,239 Now with a pre-tax bid-YTW of 5.64% based on a bid of 25.11 and a limitMaturity.
TD.PR.P PerpetualDiscount 13,607 Now with a pre-tax bid-YTW of 5.46% based on a bid of 24.32 and a limitMaturity.
PWF.PR.H PerpetualPremium 11,500 Now with a pre-tax bid-YTW of 5.82% based on a bid of 25.00 and a limitMaturity.
CM.PR.I PerpetualDiscount 11,478 Now with a pre-tax bid-YTW 5.81% based on a bid of 20.52 and a limitMaturity.

There were three other index-included $25-pv-equivalent issues trading over 10,000 shares today.

Comments

3 responses to “March 10, 2008”

  1. madequota

    “This is the type of boneheaded analysis that is rife now that the smiley-boy salesmen have taken over the industry completely.”

    Hey Mr. Hymas . . . stop whining! . . . only kidding; that’s a great quote. As you would guess, I agree with your commentary on this one completely. I would go as far to say that most of the “regional fed presidents” fit into some element of this category as well.

    How about those financials today? See; all the central banks have to do to settle things down is print a new whack of cash . . . tell the world they’re “injecting liquidity” into the market, and everybody’s happy . . . everybody except those who were selling financials yesterday.

    Regarding pref action, the market seems to have settled into the current “corrected” level on, as you’ve observed, pretty light volume. I’m still seeing some pretty strong support bids on a number of these issues, and as I mentioned yesterday, RBC appears now to have transitioned from a seller to a buyer. I’m going to miss having to continually bash them for dumping, and now start to praise them for supporting the market . . . but that in itself confirms my objectivity!

    Do you have an opinion on the YPG prefs? Another trust unit company with prefs, and this makes me a little nervous (EPP.PR.A is the one that makes me nervous about this category of pref) . . . on the other hand YPG.PR.B offers up a 6% div at its current level. May not be a bad play. Any comment on this one would be appreciated.

    madequota

  2. jiHymas

    Volume seems to have picked up today – whether that is connected to the new Term Securities Lending Facility is something I cannot even speculate upon!

    No real opinion on the YPG prefs … YPG.PR.A had a poor reception at issue as did YPG.PR.B. They’re only Pfd-3(high) [DBRS] and P-3 [S&P] so I don’t really pay much attention to them.

  3. madequota

    Thank you for that . . . nice supporting bids continue to develop . . . eg. BMO has an iceberg, followed by a second order for 5000 sh of MFC.PR.B @ 22.50 / RY.PR.E has 3000 sh on the bid @ 21.12, with a single bid for 4000 sh underneath it at 21.11 . . . last fall this kind of support just wasn’t there; hence the “perpetual” decline.

    The banks (common) have come off their morning high, but the market is still pretty giddy over all this newly minted cash! . . . gut feel is that pref slide will not be as severe as previous!

    madequota

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