July 4, 2008

Maple bonds aren’t selling well this year:

Four banks outside Canada raised just C$500 million ($492 million) selling Maple bonds, or foreign debt denominated in Canadian dollars, according to Bloomberg data. That compares with C$20.6 billion from 55 issues in the first half of 2007.

“Investors are having a preference for well-known, well- understood companies, and they have a home-market bias,” said Chris Seip, head of Canadian debt capital markets at RBC Capital Markets in Toronto.

By contrast, bond sales by Canadian governments rose 19 percent in the first half of the year, to C$40.5 billion. Corporate bond sales rose 1.4 percent to C$45.3 billion, according to Bloomberg data.

Speaking of “home market bias”, I suspect that FTU.PR.A (US Financial 15 Split) is ripe for another downgrade … it was downgraded to Pfd-3 when asset coverage was 1.4+:1 … asset coverage is just under 1.1:1 as of June 30.

My notes from yesterday attracted some comment on Financial Webring Forum:

To quote Preferred Share High Priest Hymas from his Prefblog of yesterday:

Let’s see: 250bp over long corporates, 10-year high and short-lived…

Need I say more?

Let’s hope people don’t come to their senses too fast

Well, I like flattery as much as anybody else … but remember my feelings about market timing! I may think that this episode is overblown, I may be able to show it’s a ten-year high, I may think that in the past spikes such as the current episode have been short-lived … but I don’t know anything. Markets teach you to be humble and not to get too greedy! So … well, if you’ve been looking for an entry point, now seems to be a good time! But don’t over-allocate (my rule of thumb is a maximum of 50% of the fixed income portion of your portfolio can go into prefs), don’t get greedy and don’t mortgage the house.

And FWF participant has a very good idea:

I’ve also been trying to swap ‘weak pairs’ of perpetuals that I already owned before the slide to book those losses. I may as well make a positive out of a negative.

This is smart thinking. ‘Weak Pairs’ were discussed in an article I published last year. They can even be extremely weak pairs … that is, it’s also reasonable to do this with PerpetualDiscounts from the same issuer as long as the coupon isn’t all that much different … maybe I’m being too fussy, but the more similar the elements of a swap, the better it is for a retail investor who doesn’t trade very much and doesn’t want to spend a lot of time on analysis.

Look …. say you own one of the RY low coupon issues and you’re sitting on a capital loss. Swapping it into another RY low coupon issue and crystallizing that loss for tax purposes is good business, as long as you don’t give up yield after paying commission. In this market, you might even be able to pick up a few basis points, if you show some discipline and watch the market.

As long as the coupons aren’t too different, and the issuer is the same, overall investment characteristics of the issues will be almost identical and (when following this particular example and swapping RY issues) then you can take advantage of the fact that the ex-dates are identical and trade off current yield rather than YTM. Just make absolutely sure when you do this that ex-Dates are identical! Some issuers have different dates for different issues.

Anyway … the markets. I’ve got some good news, some bad news and then some good news.

The good news BCE issues rocketted today on the BCE announcement that financing has been arranged.

The bad news is that PerpetualDiscounts got hammered again.

The good news is that the markets will be closed for the weekend.

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 4.28% 2.86% 44,832 0.08 1 -0.1179% 1,118.4
Fixed-Floater 4.65% 4.36% 68,098 16.40 6 +7.7461% 1,091.5
Floater 4.02% 4.03% 52,442 17.37 3 +2.5946% 916.8
Op. Retract 4.94% 3.01% 176,996 2.64 17 -0.1576% 1,049.2
Split-Share 5.32% 6.09% 65,072 4.16 14 -0.2670% 1,037.8
Interest Bearing 6.11% 0.30% 45,157 1.99 3 +0.3381% 1,126.9
Perpetual-Premium 5.96% 5.89% 64,718 10.98 4 -0.1284% 1,006.9
Perpetual-Discount 6.12% 6.18% 249,371 13.65 67 -0.6236% 860.6
Major Price Changes
Issue Index Change Notes
MFC.PR.C PerpetualDiscount -4.3005% Now with a pre-tax bid-YTW of 6.16% based on a bid of 18.47 and a limitMaturity.
CM.PR.P PerpetualDiscount -3.4868% Now with a pre-tax bid-YTW of 6.64% based on a bid of 20.76 and a limitMaturity.
MFC.PR.B PerpetualDiscount -3.4673% Now with a pre-tax bid-YTW of 6.11% based on a bid of 19.21 and a limitMaturity.
PWF.PR.E PerpetualDiscount -3.0263% Now with a pre-tax bid-YTW of 6.33% based on a bid of 22.11 and a limitMaturity.
HSB.PR.C PerpetualDiscount -2.4038% Now with a pre-tax bid-YTW of 6.33% based on a bid of 20.30 and a limitMaturity.
FFN.PR.A SplitShare -2.3976% Asset coverage of just under 1.8:1 as of June 30, according to the company. Now with a pre-tax bid-YTW of 5.73% based on a bid of 9.77 and a hardMaturity 2014-12-1 a t 10.00.
PWF.PR.H PerpetualDiscount -2.3849% Now with a pre-tax bid-YTW of 6.28% based on a bid of 23.33 and a limitMaturity.
BAM.PR.J OpRet -2.2689% Now with a pre-tax bid-YTW of 6.42% based on a bid of 23.26 and a softMaturity 2018-3-30 at 25.00. Compare with BAM.PR.H (5.20% to 2012-3-30), BAM.PR.I (5.55% to 2013-12-30) and BAM.PR.O (6.50% to 2013-6-30).
PWF.PR.F PerpetualDiscount -2.1067% Now with a pre-tax bid-YTW of 6.41% based on a bid of 20.91 and a limitMaturity.
SLF.PR.E PerpetualDiscount -1.8667% Now with a pre-tax bid-YTW of 6.17% based on a bid of 18.40 and a limitMaturity.
POW.PR.B PerpetualDiscount -1.8639% Now with a pre-tax bid-YTW of 6.39% based on a bid of 21.06 and a limitMaturity.
PWF.PR.L PerpetualDiscount -1.7176% Now with a pre-tax bid-YTW of 6.32% based on a bid of 20.60 and a limitMaturity.
GWO.PR.I PerpetualDiscount -1.6894% Now with a pre-tax bid-YTW of 6.29% based on a bid of 18.04 and a limitMaturity.
CM.PR.H PerpetualDiscount -1.4674% Now with a pre-tax bid-YTW of 6.64% based on a bid of 18.13 and a limitMaturity.
CM.PR.E PerpetualDiscount -1.3895% Now with a pre-tax bid-YTW of 6.60% based on a bid of 21.29 and a limitMaturity.
IAG.PR.A PerpetualDiscount -1.3041% Now with a pre-tax bid-YTW of 6.13% based on a bid of 18.92 and a limitMaturity.
RY.PR.A PerpetualDiscount -1.2973% Now with a pre-tax bid-YTW of 6.19% based on a bid of 18.26 and a limitMaturity.
RY.PR.D PerpetualDiscount -1.1260% Now with a pre-tax bid-YTW of 6.20% based on a bid of 18.44 and a limitMaturity.
SLF.PR.C PerpetualDiscount -1.1200% Now with a pre-tax bid-YTW of 6.05% based on a bid of 18.54 and a limitMaturity.
BNA.PR.B SplitShare -1.0726% Asset coverage of just under 3.6:1 as of May 30 according to the company. Now with a pre-tax bid-YTW of 8.44% based on a bid of 20.29 and a hardMaturity 2016-3-25 at 25.00. Compare with BNA.PR.A (6.03% to 2010-9-30) and BNA.PR.C (7.33% to 2019-1-10).
NA.PR.K PerpetualDiscount -1.0661% Now with a pre-tax bid-YTW of 6.41% based on a bid of 23.20 and a limitMaturity.
BCE.PR.Z FixFloat +6.6228%  
BCE.PR.A FixFloat +7.1741%  
BCE.PR.C FixFloat +7.1741%  
BCE.PR.I FixFloat +7.6923%  
BAM.PR.K Floater +8.0497%  
BCE.PR.G FixFloat +8.5650%  
BCE.PR.R FixFloat +9.2444%  
Volume Highlights
Issue Index Volume Notes
TCA.PR.Y PerpetualDiscount 103,839 Nesbitt crossed 100,000 at 48.00. Now with a pre-tax bid-YTW of 5.75% based on a bid of 48.20 and a limitMaturity.
FAL.PR.B Scraps (Would be FixFloat, but there are volume concerns) 150,037 Desjardins crossed 150,000 in two tranches at 24.80.
MFC.PR.C PerpetualDiscount 80,011 RBC crossed 71,100 at 18.60. Now with a pre-tax bid-YTW of 6.16% based on a bid of 18.47 and a limitMaturity.
MFC.PR.B PerpetualDiscount 77,711 RBC crossed 71,100 at 19.20. Gee, I wonder if this trade is somehow related to the cross of MFC.PR.C? Now with a pre-tax bid-YTW of 6.11% based on a bid of 19.21 and a limitMaturity.
CM.PR.I PerpetualDiscount 51,695 Anonymous – maybe not the same anonymous – bought three tranches of 10,000 shares each from RBC, at 17.90, 17.90 & 17.92. Now with a pre-tax bid-YTW of 6.57% based on a bid of 17.95 and a limitMaturity.

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

5 Responses to “July 4, 2008”

  1. prefwatcher says:

    Many TSE listed preferreds have been sliding of late but the NYSE listed preferreds have really fallen out of bed. Take a look at the charts and yields of HBA.PR.F, BAC.PR.B, PUK.PR.A, MET.PR.B as examples. A complete list af US preferreds can be found in the business section of the Sunday NY Times. Many US preferreds fell 20% or more in June. One that held up well was the Nexen US $ pay preferreds (NXY.PR.B) yielding 7.56%. This is the only NYSE listed Canadian preferred that I can find…there used to a lot more.

  2. jiHymas says:

    Note that when looking for these symbols on the NYSE website, there are no dots in the symbols.

    HBAPRF – Floating Perp (three month LIBOR + 0.75%), last trade 16.25

    BACPRB – 6.25% TruPS, maturing 2055-3-29, last trade 19.43

    PUKPRA – 6.50% Perps, last trade 17.65

    METPRB – 6.50% Perps, last trade 20.88

    All have a par value of $25.00.

    The yield on the holdings of Vanguard Long-Term Investment-Grade Fund Investor Shares (VWESX) is 6.19%.

    Your point is well taken – but I’m not sure how much arbitrage there might be between the US instruments and Canadian preferreds – the tax situation is so different.

  3. prefhound says:

    Here’s why I (generally) don’t like tax-driven swaps — even in cases where there is a well-matched pair: most people vastly overestimate the actual savings from crystallizing a tax loss.

    Here’s an example: suppose you want to sell a pref share with a tax loss of $6.00 (e.g. you bought for $25 and it is now worth $19) to reinvest in a hypothetical perfectly matched pref, which you are able to buy for the same $19. How much does this trade actually save you?

    Suppose you are in the 46% tax bracket now and in the future (and can actually use a capital loss, which means you have net gains for the past several years). A loss of $6.00 today produces tax savings = $6.00 X 46% / 2 for the inclusion rate = $1.38. This might be immediate (if you withhold some otherwise due quarterly tax payments) or you might get it next May. Most people stop here, but


    You would have got a tax refund LATER anyway, so we have to adjust for the time value of money. There are several scenarios:

    1. The perfectly matched prefs stay at $19 forever. In this case you get the tax refund when you were otherwise going to sell the first pref. If you are an active trader, that might be within a year; if you are a long-term holder of prefs, that might be in 5, 10 or 20 years. Whatever happens, though, you would get the same tax refund in the FUTURE some time. Your cash flow is +$1.38 for taxes now (or soon) vs +$1.38 for taxes N years later, where N is your average holding period for pref shares.

    Scenario 2. The perfectly matched prefs go down some more over time. Again, you crystallize your tax benefit for the loss whenever you would have otherwise sold. Now your cash flow is +$1.38 now (or soon) plus $X for future declines by year N compared with $1.38 + $X in year N if you don’t trade now. Clearly the only difference is the $1.38 now vs in Year N.

    Scenario 3. The perfectly matched prefs go up over time, maybe even get redeemed for $25. If they do, your cash flow is +$1.38 now (or soon) minus $1.38 at redemption in year N (you pay the taxes back) vs no tax in year N if you don’t trade now.

    Thus, in all scenarios, the only difference (if tax rates remain constant) is getting $1.38 now vs in year N. Economics 101 tells us that the present value of this timing difference is:

    Amount X (1 – 1/(1+discount rate)**N)
    [where I use ** as power because the caret blows up the reply window]

    The appropriate discount rate is the after-tax return on the portfolio. You can invest the proceeds in prefs, earn dividends, pay tax and use the proceeds in year N to pay any tax difference on disposition. Let’s say 4.8%, but those who can get their hands on tax refunds now to reinvest in “depressed” prefs might want to use a bigger number.

    So, now we have:

    N = 1; average holding period 1 year; tax savings = $1.38 *(1 – 1/(1.048)) = $0.06. This is hardly worth it! You are likely to recognize this loss for reasons other than tax in the near future.

    N = 5; average holding period 5 years (portfolio turnover = 20%); tax savings = $0.29 (Note that this is only 4.8% of the recognized loss; NOT the 46% marginal tax rate; nor the 23% capital gain tax rate. It is only 1.53% of the present pref value!)
    29 cents is a little better than a holding period of one year, and might even cover some of the bid-ask spreads and commission costs. HOWEVER, on a 1000 share trade, a maximum Present Value of $290 is not worth my time — this trade will take well over an hour to do — especially in illiquid markets!

    N = 10; average holding periiod 10 years (portfolio turnover = 10%); tax savings = $0.52. I show this only for completeness as it is extremely difficult to have pref share portfolio turnover as low as 10%.

    Savings will be greater if your tax rate decreases between taking the loss now and N years from now.

    the present value of savings will be greater if you want to assume a higher after-tax rate of return on your invested tax refund.

    Savings will generally be lower after commissions and bid-ask spreads are imposed on my “ideal” example.

    Savings will be greater or lower (with more risk) if you use an unmatched pref pair.

    But, even for huge unrealized losses, it is seldom worth it to spend the effort on swapping out of (even) perfectly matched pref pairs.

    I like to trade on gross features worth $1.00 a share or more, like selling PWF.PR.I for $24.90 to buy PWF.PR.E for $21.60 ($1.23 pre-tax permanent benefit) so my average holding period is not even 5 years, but more like 3. Thankfully, James brings these swaps to our attention from time to time and they are worth LOTS more than tax loss selling for its own sake.

  4. jiHymas says:

    I will certainly agree that the actual savings are better characterized as tax deferral rather than tax elimination – and as well, you only get the tax benefits if you are, indeed, deferring the tax! If you have no capital gains to offset the loss, it’s a mere bookkeeping entry.

    However, you are looking at the situation as, if I may say so, a hedge-fund type player, rather than as a fixed income investor. If you ever see a group of Portfolio Managers, there’s one easy way to pick out the Fixed Income Specialist … he’s the one on his knees, scrabbling around in the dirt for a nickel!

  5. prefhound says:

    If I were “hedged” I wouldn’t have huge losses on my prefs 😉
    Fortunately, my attitude is that the income streams I have planned on to fund my retirement are (so far) unaffected…..

    I like to look for dollars on the ground, though. Those nickels ain’t worth what they used to be!

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