September 18, 2013

Tapering? Schmapering!

Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

The editors at Bloomberg make some good points before tapering off into an absurd conclusion:

Together with the exuberant market reaction, though, the Fed’s move demonstrates a problem: Investors still don’t make a distinction between its plans for bond purchases and its pledge to keep short-term interest rates low until after the economy recovers. In futures markets, for example, the expected date of the Fed’s first increase in its interest-rate target immediately moved out by about a month, even though there was no major change in interest-rate policy.

The perception of tapering as a proxy for the Fed’s overall stance on stimulus is unfortunate, because there may be good reasons to taper that are not related to the outlook for the economy. The Fed, for example, might become concerned that the size of its holdings will leave it too exposed to losses or hamper the functioning of markets. As a result, perfectly sensible moves to cut back on bond purchases can send the wrong signal. Alternatively, the desire to manage perceptions can push the Fed into maintaining quantitative easing against its better judgment.

Dan Hallett writes an excellent piece in the Globe titled Investing in floating rate notes? Here’s what the industry isn’t telling you emphasizing the fact that interest rate risk is not the same as credit risk:

While FRNs offer protection against rising rates, the largely-corporate profile of FRN issuers (including a good proportion of below-investment grade companies) means that FRN fund investors are assuming a good deal of credit risk. A significant but less concerning risk is the decreasing returns that would result in a falling interest rate environment.

Trimark Floating Rate Income fund lost 27 per cent of its value during the financial crisis – significant but not insurmountable. The fund has fully recovered, having long surpassed its previous peak. But BMO Floating Rate Income fund is different story.

BMO’s fund lost nearly half of its value – more than many stock funds – and remains under water as of August 31. Its previous peak is more than seven years into the past. It’s no surprise that BMO Floating Rate Income sports the highest risk rating of its peers.

The Canadian preferred share market roared ahead on the non-tapering news, with PerpetualDiscounts winning 69bp, FixedResets gaining 24bp and DeemedRetractibles up 36bp. The Performance Highlights table is suitably enormous, heavily weighted towards winning Straight Perpetuals. Volume was quite high.

PerpetualDiscounts now yield 5.65%, equivalent to 7.34% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 5.0%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 235bp, a sharp decline from the 250bp reported September 11.

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 -0.7333 % 2,579.6
FixedFloater 4.28 % 3.59 % 30,159 18.13 1 0.4071 % 3,880.4
Floater 2.62 % 2.88 % 65,962 20.05 5 -0.7333 % 2,785.3
OpRet 4.61 % 1.78 % 68,748 0.53 3 -0.0384 % 2,644.9
SplitShare 4.75 % 4.79 % 56,208 4.07 6 0.1350 % 2,946.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0384 % 2,418.5
Perpetual-Premium 5.85 % 5.76 % 114,218 3.74 2 0.1182 % 2,266.3
Perpetual-Discount 5.57 % 5.65 % 138,343 14.25 36 0.6852 % 2,334.5
FixedReset 4.92 % 3.63 % 240,623 3.49 85 0.2414 % 2,461.0
Deemed-Retractible 5.14 % 4.66 % 197,325 6.91 43 0.3592 % 2,371.1
Performance Highlights
Issue Index Change Notes
PWF.PR.A Floater -1.91 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-18
Maturity Price : 22.78
Evaluated at bid price : 23.06
Bid-YTW : 2.26 %
CU.PR.C FixedReset -1.57 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-01
Maturity Price : 25.00
Evaluated at bid price : 25.00
Bid-YTW : 4.08 %
TRI.PR.B Floater -1.30 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-18
Maturity Price : 22.44
Evaluated at bid price : 22.70
Bid-YTW : 2.28 %
SLF.PR.H FixedReset -1.19 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 24.95
Bid-YTW : 3.95 %
RY.PR.C Deemed-Retractible -1.15 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.02
Bid-YTW : 4.66 %
PWF.PR.E Perpetual-Discount 1.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-18
Maturity Price : 23.93
Evaluated at bid price : 24.17
Bid-YTW : 5.77 %
PWF.PR.L Perpetual-Discount 1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-18
Maturity Price : 22.46
Evaluated at bid price : 22.75
Bid-YTW : 5.68 %
GWO.PR.Q Deemed-Retractible 1.03 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.60
Bid-YTW : 5.85 %
SLF.PR.D Deemed-Retractible 1.04 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.30
Bid-YTW : 6.31 %
RY.PR.W Perpetual-Discount 1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-18
Maturity Price : 24.84
Evaluated at bid price : 25.07
Bid-YTW : 4.92 %
PWF.PR.K Perpetual-Discount 1.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-18
Maturity Price : 22.12
Evaluated at bid price : 22.52
Bid-YTW : 5.56 %
SLF.PR.A Deemed-Retractible 1.09 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.29
Bid-YTW : 6.10 %
GWO.PR.G Deemed-Retractible 1.12 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.51
Bid-YTW : 5.95 %
IFC.PR.A FixedReset 1.18 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.93
Bid-YTW : 4.45 %
POW.PR.D Perpetual-Discount 1.25 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-18
Maturity Price : 22.21
Evaluated at bid price : 22.63
Bid-YTW : 5.61 %
CU.PR.D Perpetual-Discount 1.42 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-18
Maturity Price : 23.19
Evaluated at bid price : 23.50
Bid-YTW : 5.24 %
SLF.PR.C Deemed-Retractible 1.43 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.30
Bid-YTW : 6.31 %
MFC.PR.B Deemed-Retractible 1.45 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.70
Bid-YTW : 6.33 %
IFC.PR.C FixedReset 1.46 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.75
Bid-YTW : 3.13 %
CIU.PR.A Perpetual-Discount 1.49 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-18
Maturity Price : 21.16
Evaluated at bid price : 21.16
Bid-YTW : 5.49 %
GWO.PR.H Deemed-Retractible 1.58 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.55
Bid-YTW : 6.07 %
SLF.PR.E Deemed-Retractible 1.61 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.46
Bid-YTW : 6.28 %
CU.PR.F Perpetual-Discount 1.62 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-18
Maturity Price : 21.30
Evaluated at bid price : 21.30
Bid-YTW : 5.33 %
FTS.PR.F Perpetual-Discount 1.69 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-18
Maturity Price : 22.54
Evaluated at bid price : 22.83
Bid-YTW : 5.40 %
GWO.PR.I Deemed-Retractible 1.73 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.73
Bid-YTW : 6.13 %
CU.PR.G Perpetual-Discount 1.82 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-18
Maturity Price : 21.30
Evaluated at bid price : 21.30
Bid-YTW : 5.33 %
PWF.PR.S Perpetual-Discount 1.86 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-18
Maturity Price : 22.15
Evaluated at bid price : 22.50
Bid-YTW : 5.40 %
ENB.PR.H FixedReset 1.93 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-18
Maturity Price : 22.40
Evaluated at bid price : 23.22
Bid-YTW : 4.42 %
GWO.PR.R Deemed-Retractible 2.03 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.65
Bid-YTW : 5.97 %
ELF.PR.G Perpetual-Discount 2.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-18
Maturity Price : 21.52
Evaluated at bid price : 21.52
Bid-YTW : 5.62 %
FTS.PR.H FixedReset 2.41 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-18
Maturity Price : 21.25
Evaluated at bid price : 21.25
Bid-YTW : 4.23 %
Volume Highlights
Issue Index Shares
Traded
Notes
W.PR.H Perpetual-Discount 86,200 RBC crossed blocks of 41,300 and 40,300, both at 23.57.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-18
Maturity Price : 23.32
Evaluated at bid price : 23.60
Bid-YTW : 5.93 %
TRP.PR.A FixedReset 77,312 Scotia crossed 50,000 at 25.00.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-18
Maturity Price : 23.81
Evaluated at bid price : 25.00
Bid-YTW : 3.94 %
PWF.PR.R Perpetual-Discount 70,583 TD crossed 55,000 at 24.50.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-18
Maturity Price : 24.25
Evaluated at bid price : 24.65
Bid-YTW : 5.65 %
PWF.PR.K Perpetual-Discount 69,808 TD crossed 60,500 at 22.33.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-18
Maturity Price : 22.12
Evaluated at bid price : 22.52
Bid-YTW : 5.56 %
PWF.PR.S Perpetual-Discount 67,189 TD crossed 45,000 at 22.35.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-18
Maturity Price : 22.15
Evaluated at bid price : 22.50
Bid-YTW : 5.40 %
W.PR.J Perpetual-Discount 60,220 RBC crossed blocks of 40,000 and 17,900 at 24.10.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-18
Maturity Price : 23.92
Evaluated at bid price : 24.16
Bid-YTW : 5.90 %
There were 54 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PWF.PR.A Floater Quote: 23.06 – 23.96
Spot Rate : 0.9000
Average : 0.6522

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-18
Maturity Price : 22.78
Evaluated at bid price : 23.06
Bid-YTW : 2.26 %

IFC.PR.A FixedReset Quote: 23.93 – 24.49
Spot Rate : 0.5600
Average : 0.3161

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.93
Bid-YTW : 4.45 %

MFC.PR.D FixedReset Quote: 25.75 – 26.10
Spot Rate : 0.3500
Average : 0.2137

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-19
Maturity Price : 25.00
Evaluated at bid price : 25.75
Bid-YTW : 2.57 %

TD.PR.A FixedReset Quote: 25.34 – 25.70
Spot Rate : 0.3600
Average : 0.2278

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.34
Bid-YTW : 3.10 %

GWO.PR.G Deemed-Retractible Quote: 23.51 – 23.98
Spot Rate : 0.4700
Average : 0.3380

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.51
Bid-YTW : 5.95 %

CU.PR.E Perpetual-Discount Quote: 23.20 – 23.60
Spot Rate : 0.4000
Average : 0.2806

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-18
Maturity Price : 22.79
Evaluated at bid price : 23.20
Bid-YTW : 5.31 %

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