Craig Torres and Aki Ito provide some interesting charts illustrating the Fed’s insouciance regarding the prospects of oil-fuelled deflation:
There’s core inflation:
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There’s consumer expectations of inflation:
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… and there’s trimmed mean inflation:
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Oil, Schmoil!
But hey, how ’bout that Canadian economy, eh?
Canadian payroll employment dropped in November by the most in almost five years, a government report showed Thursday, adding to concern the outlook for the nation’s labor market is dimming as oil prices tumble.
The number of non-farm payroll employees fell by 33,000, Statistics Canada said, the most since August 2009, just after the last recession. The Ottawa-based agency also published revised labor force data Wednesday that cut the total number of 2014 job gains by more than a third.
It’s not doing the loonie any good:
Weak oil prices and a surging U.S. currency made another dent in the value of the Canadian dollar Thursday, adding momentum to the loonie’s unprecedented downward spiral.
The dollar, which has fallen about 14 per cent in the past six months, closed at 79.30 cents (U.S.), down more than half a cent on the day.
Artis REIT, proud issuer of AX.PR.A, AX.PR.E and AX.PR.G, was confirmed at Pfd-3(low) by DBRS:
DBRS Limited (DBRS) has today confirmed the ratings of Artis Real Estate Investment Trust’s (Artis or the Trust) Senior Unsecured Debentures at BBB (low) and Preferred Trust Units at Pfd-3 (low), all with Stable trends. The rating confirmation reflects the expected improvement in key financial metrics and growth in operating income driven mainly by significant property acquisitions over the last few years. The ratings continue to be supported by Artis’s mid-sized and diversified commercial real estate portfolio, diverse tenant base and conservative financial profile; however, they remain constrained by a concentration of properties in suburban office and smaller retail formats as well as the Trust’s exposure to small or secondary markets, limited scale within each asset type segment and high proportion of secured debt.
…
DBRS notes that the achievement of a positive rating action for Artis will be less dependent on improving coverage and leverage metrics and more reliant on increasing size and scale while improving overall asset quality. On the other hand, weaker-than-expected operating and earnings performance and/or higher financial leverage that leads to EBITDA interest coverage falling below 2.20 times on a sustained basis could result in a negative rating action.
Happy preferred share investors are so excited about this market they can hardly speak!:
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This is not the worst day ever for FixedResets! There was November 25, 2008 (-3.38%), October 10, 2008 (-2.92%) [which ended so wildly that I had to issue an update to PrefLetter a week later, because the prices didn’t make any sense at all], November 19, 2008 (-2.67%), October 23, 2008 (-2.37%) and November 21, 2008 (-2.21%). So this is only the sixth worse day for FixedResets ever. Note that the quoted numbers are taken from the monthly revisions to the indices and therefore will not necessarily match the originally published figures.
Alert Assiduous Readers will have noticed, however, that all these chart-topping days were in October and November, 2008, when information regarding the impending collapse of the Canadian economy and zero-recovery bankruptcy of every Canadian bank was first leaked to the better-connected individuals in the market (these events were later cancelled), so these were all credit-based disasters. So we have the privilege of having witnessed the worst ever yield-based FixedReset day. And, of course, FixedResets are now a much larger part of the market than they were back in the old days.
It was (ahem) a poor day for the Canadian preferred share market, with PerpetualDiscounts and DeemedRetractibles both off 16bp and FixedResets down 174bp. The Performance Highlights table … well, yeah, the Performance Highlights table. Volume was high.
For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.
Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread
Here’s TRP:
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So according to this, the cheapest issue is now TRP.PR.C, bid at 17.30; it is $0.57 cheap, and will reset 2016-1-30 at +154. TRP.PR.E, bid at 25.11 and resetting at +235bp on 2019-10-30 is $0.75 rich.
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MFC.PR.F is now visibly above the line defined by its peers.
Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).
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Changes in the market level, which have had the visible effect of reducing Implied Volatility, have resulted in the cheapest issue relative to its peers being BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 23.01 to be $0.29 cheap. BAM.PR.T, resetting at +231bp 2017-3-31 is bid at 23.85 and appears to be $0.55 rich.
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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 17.30, looks $1.28 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.21, looks $1.31 expensive and resets 2019-3-1.
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The point representing the DC.PR.B / DC.PR.D pair, interconvertible 2019-9-30, is not shown: it has an implied three-month bill yield of negative 1.16% – rather an extreme view for the market to take!
It is interesting to see that while the TRP.PR.A / TRP.PR.F pair is now showing a positive breakeven three-month bill yield over the next five years, the BNS.PR.P / BNS.PR.A pair, resetting 2018-4-26, is calculated at negative 0.19%. surprising to see this in an investment-grade pair, but when the market goes nuts, it doesn’t fool around!
Pairs equivalence is looking more rational, with the investment grade pairs (which are presumably more closely watched and easier to trade) do show a rising trend with increasing time to interconversion which, qualitatively speaking, is entirely reasonable, although the increase (over five years-odd) looks pretty substantial given the scale of the chart (two years-odd).
| 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 | -2.4838 % | 2,284.2 |
| FixedFloater | 4.32 % | 3.50 % | 20,044 | 18.43 | 1 | 0.1821 % | 4,093.0 |
| Floater | 3.16 % | 3.34 % | 54,162 | 18.89 | 4 | -2.4838 % | 2,428.3 |
| OpRet | 4.05 % | 1.90 % | 101,958 | 0.38 | 1 | 0.0395 % | 2,752.0 |
| SplitShare | 4.30 % | 4.12 % | 31,975 | 3.59 | 5 | -0.3032 % | 3,181.1 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0395 % | 2,516.4 |
| Perpetual-Premium | 5.43 % | -6.99 % | 56,222 | 0.08 | 19 | -0.0638 % | 2,506.5 |
| Perpetual-Discount | 5.03 % | 4.88 % | 110,630 | 15.03 | 16 | -0.1621 % | 2,755.6 |
| FixedReset | 4.41 % | 3.55 % | 204,947 | 17.06 | 77 | -1.7390 % | 2,429.7 |
| Deemed-Retractible | 4.93 % | 0.31 % | 100,758 | 0.15 | 39 | -0.1564 % | 2,636.6 |
| FloatingReset | 2.51 % | 2.85 % | 74,515 | 6.44 | 7 | -0.7000 % | 2,333.5 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| HSE.PR.A | FixedReset | -7.11 % | Yep, this is real all right. Of the last twenty-five trades, twenty three were board lots and all but five of these were executed at or below the closing bid. So it’s real. Volume was 33,561, with a VWAP of 17.95. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 17.65 Evaluated at bid price : 17.65 Bid-YTW : 3.74 % |
| MFC.PR.N | FixedReset | -5.21 % | Sort of real! Three board lots traded just above the last bid, but most of the final twenty-five trades were fifty cents higher than this figure. Volume was 20,800, with a VWAP of 24.55. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.65 Bid-YTW : 4.23 % |
| TRP.PR.B | FixedReset | -5.06 % | Yes, sir, this is real all right! Of the last twenty five trades, all but one were at or below the last bid. Volume on the day was 57,112, with a VWAP of 15.21. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 15.00 Evaluated at bid price : 15.00 Bid-YTW : 3.51 % |
| BNS.PR.Y | FixedReset | -4.72 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.21 Bid-YTW : 4.39 % |
| PWF.PR.P | FixedReset | -4.51 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 19.25 Evaluated at bid price : 19.25 Bid-YTW : 3.22 % |
| TRP.PR.E | FixedReset | -4.22 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 22.82 Evaluated at bid price : 24.05 Bid-YTW : 3.43 % |
| TRP.PR.D | FixedReset | -4.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 22.66 Evaluated at bid price : 23.63 Bid-YTW : 3.46 % |
| MFC.PR.L | FixedReset | -3.85 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.70 Bid-YTW : 4.10 % |
| BAM.PR.B | Floater | -3.77 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 15.05 Evaluated at bid price : 15.05 Bid-YTW : 3.34 % |
| TRP.PR.A | FixedReset | -3.61 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 20.00 Evaluated at bid price : 20.00 Bid-YTW : 3.57 % |
| ENB.PF.G | FixedReset | -3.52 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 22.26 Evaluated at bid price : 23.02 Bid-YTW : 4.05 % |
| BAM.PR.K | Floater | -3.50 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 14.91 Evaluated at bid price : 14.91 Bid-YTW : 3.37 % |
| BNS.PR.Z | FixedReset | -3.47 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.25 Bid-YTW : 4.20 % |
| PWF.PR.T | FixedReset | -3.27 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 23.30 Evaluated at bid price : 25.15 Bid-YTW : 3.19 % |
| BMO.PR.Q | FixedReset | -3.25 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.25 Bid-YTW : 4.19 % |
| ENB.PF.A | FixedReset | -3.25 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 22.23 Evaluated at bid price : 22.91 Bid-YTW : 4.02 % |
| MFC.PR.K | FixedReset | -3.10 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.74 Bid-YTW : 4.00 % |
| BAM.PR.C | Floater | -3.10 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 15.00 Evaluated at bid price : 15.00 Bid-YTW : 3.35 % |
| GWO.PR.N | FixedReset | -2.96 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.05 Bid-YTW : 6.02 % |
| GWO.PR.F | Deemed-Retractible | -2.90 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2015-02-28 Maturity Price : 25.00 Evaluated at bid price : 25.15 Bid-YTW : 4.31 % |
| MFC.PR.M | FixedReset | -2.71 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.05 Bid-YTW : 4.08 % |
| ENB.PR.F | FixedReset | -2.63 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 21.47 Evaluated at bid price : 21.47 Bid-YTW : 4.03 % |
| ENB.PF.C | FixedReset | -2.46 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 22.27 Evaluated at bid price : 23.00 Bid-YTW : 4.00 % |
| IAG.PR.A | Deemed-Retractible | -2.40 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.40 Bid-YTW : 4.98 % |
| MFC.PR.F | FixedReset | -2.30 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.08 Bid-YTW : 5.72 % |
| BAM.PR.R | FixedReset | -2.18 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 21.90 Evaluated at bid price : 22.45 Bid-YTW : 3.59 % |
| ENB.PR.J | FixedReset | -2.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 22.33 Evaluated at bid price : 23.00 Bid-YTW : 3.88 % |
| ENB.PF.E | FixedReset | -2.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 22.26 Evaluated at bid price : 23.00 Bid-YTW : 4.03 % |
| ENB.PR.Y | FixedReset | -2.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 21.05 Evaluated at bid price : 21.05 Bid-YTW : 4.05 % |
| BAM.PR.T | FixedReset | -2.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 23.09 Evaluated at bid price : 23.40 Bid-YTW : 3.46 % |
| SLF.PR.H | FixedReset | -2.09 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.40 Bid-YTW : 3.45 % |
| CM.PR.P | FixedReset | -2.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 22.97 Evaluated at bid price : 24.46 Bid-YTW : 3.18 % |
| FTS.PR.K | FixedReset | -2.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 23.07 Evaluated at bid price : 24.54 Bid-YTW : 3.03 % |
| MFC.PR.J | FixedReset | -2.00 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.99 Bid-YTW : 3.67 % |
| BMO.PR.T | FixedReset | -1.97 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 23.02 Evaluated at bid price : 24.51 Bid-YTW : 3.14 % |
| BAM.PR.X | FixedReset | -1.96 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 20.05 Evaluated at bid price : 20.05 Bid-YTW : 3.54 % |
| ENB.PR.D | FixedReset | -1.91 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 21.07 Evaluated at bid price : 21.07 Bid-YTW : 3.96 % |
| BNS.PR.B | FloatingReset | -1.89 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.90 Bid-YTW : 2.89 % |
| BNS.PR.C | FloatingReset | -1.70 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.24 Bid-YTW : 2.85 % |
| CM.PR.O | FixedReset | -1.63 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 23.09 Evaluated at bid price : 24.70 Bid-YTW : 3.20 % |
| NA.PR.S | FixedReset | -1.59 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 23.15 Evaluated at bid price : 24.80 Bid-YTW : 3.26 % |
| FTS.PR.M | FixedReset | -1.54 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 23.14 Evaluated at bid price : 24.91 Bid-YTW : 3.38 % |
| BMO.PR.W | FixedReset | -1.53 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 22.96 Evaluated at bid price : 24.40 Bid-YTW : 3.13 % |
| BAM.PF.G | FixedReset | -1.50 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 23.11 Evaluated at bid price : 24.92 Bid-YTW : 3.77 % |
| SLF.PR.B | Deemed-Retractible | -1.48 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.63 Bid-YTW : 5.07 % |
| MFC.PR.I | FixedReset | -1.48 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.32 Bid-YTW : 3.78 % |
| FTS.PR.H | FixedReset | -1.45 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 17.05 Evaluated at bid price : 17.05 Bid-YTW : 3.36 % |
| SLF.PR.G | FixedReset | -1.44 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 17.80 Bid-YTW : 6.23 % |
| BMO.PR.R | FloatingReset | -1.36 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.90 Bid-YTW : 2.84 % |
| CGI.PR.D | SplitShare | -1.34 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2023-06-14 Maturity Price : 25.00 Evaluated at bid price : 25.01 Bid-YTW : 3.83 % |
| TD.PF.A | FixedReset | -1.28 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 23.07 Evaluated at bid price : 24.70 Bid-YTW : 3.13 % |
| MFC.PR.G | FixedReset | -1.28 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2016-12-19 Maturity Price : 25.00 Evaluated at bid price : 25.52 Bid-YTW : 3.54 % |
| TRP.PR.C | FixedReset | -1.27 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 17.05 Evaluated at bid price : 17.05 Bid-YTW : 3.55 % |
| TD.PF.C | FixedReset | -1.24 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 23.02 Evaluated at bid price : 24.60 Bid-YTW : 3.16 % |
| TD.PF.B | FixedReset | -1.24 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 23.06 Evaluated at bid price : 24.61 Bid-YTW : 3.14 % |
| ENB.PR.H | FixedReset | -1.22 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 20.20 Evaluated at bid price : 20.20 Bid-YTW : 3.90 % |
| FTS.PR.J | Perpetual-Discount | -1.20 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 24.18 Evaluated at bid price : 24.60 Bid-YTW : 4.88 % |
| IFC.PR.A | FixedReset | -1.20 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.50 Bid-YTW : 5.48 % |
| TD.PR.Z | FloatingReset | -1.19 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.98 Bid-YTW : 2.82 % |
| RY.PR.Z | FixedReset | -1.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 23.22 Evaluated at bid price : 25.00 Bid-YTW : 3.04 % |
| BAM.PF.F | FixedReset | -1.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 23.20 Evaluated at bid price : 25.05 Bid-YTW : 3.73 % |
| NA.PR.Q | FixedReset | -1.09 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.35 Bid-YTW : 3.22 % |
| TRP.PR.F | FloatingReset | -1.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 19.00 Evaluated at bid price : 19.00 Bid-YTW : 3.29 % |
| BMO.PR.S | FixedReset | -1.03 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 23.11 Evaluated at bid price : 24.70 Bid-YTW : 3.20 % |
| NA.PR.W | FixedReset | -1.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 23.05 Evaluated at bid price : 24.70 Bid-YTW : 3.14 % |
| SLF.PR.A | Deemed-Retractible | -1.00 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.75 Bid-YTW : 4.95 % |
| BMO.PR.J | Deemed-Retractible | 1.02 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2015-02-28 Maturity Price : 25.50 Evaluated at bid price : 25.70 Bid-YTW : -8.87 % |
| MFC.PR.B | Deemed-Retractible | 1.03 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.45 Bid-YTW : 5.03 % |
| GWO.PR.P | Deemed-Retractible | 1.72 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2021-03-31 Maturity Price : 25.00 Evaluated at bid price : 26.55 Bid-YTW : 4.35 % |
| GWO.PR.I | Deemed-Retractible | 1.82 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.10 Bid-YTW : 5.04 % |
| BNS.PR.A | FloatingReset | 2.94 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.15 Bid-YTW : 3.08 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| TD.PR.Q | Deemed-Retractible | 136,060 | Called for redemption March 2. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-03-02 Maturity Price : 25.50 Evaluated at bid price : 25.58 Bid-YTW : 1.39 % |
| ENB.PR.H | FixedReset | 103,708 | Nesbitt crossed 72,000 at 20.45. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 20.20 Evaluated at bid price : 20.20 Bid-YTW : 3.90 % |
| MFC.PR.M | FixedReset | 56,850 | Nesbitt crossed 40,000 at 24.34. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.05 Bid-YTW : 4.08 % |
| CU.PR.G | Perpetual-Discount | 46,428 | National bought 25,000 from RBC at 23.71. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 23.27 Evaluated at bid price : 23.60 Bid-YTW : 4.82 % |
| TRP.PR.B | FixedReset | 38,012 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 15.00 Evaluated at bid price : 15.00 Bid-YTW : 3.51 % |
| TRP.PR.C | FixedReset | 34,936 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-29 Maturity Price : 17.05 Evaluated at bid price : 17.05 Bid-YTW : 3.55 % |
| There were 48 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| GWO.PR.F | Deemed-Retractible | Quote: 25.15 – 26.04 Spot Rate : 0.8900 Average : 0.5147 YTW SCENARIO |
| MFC.PR.N | FixedReset | Quote: 23.65 – 24.20 Spot Rate : 0.5500 Average : 0.3349 YTW SCENARIO |
| MFC.PR.H | FixedReset | Quote: 25.63 – 26.13 Spot Rate : 0.5000 Average : 0.3028 YTW SCENARIO |
| TRP.PR.F | FloatingReset | Quote: 19.00 – 19.95 Spot Rate : 0.9500 Average : 0.7742 YTW SCENARIO |
| SLF.PR.I | FixedReset | Quote: 25.53 – 25.99 Spot Rate : 0.4600 Average : 0.3048 YTW SCENARIO |
| TRP.PR.A | FixedReset | Quote: 20.00 – 20.49 Spot Rate : 0.4900 Average : 0.3410 YTW SCENARIO |
“So we have the privilege of having witnessed the worst ever yield-based FixedReset day.”. I am so delighted! Sarcasm aside, I am trying to understand the recent price drops a bit better. Are you saying here that today’s record price drop is due to: Concern over outlook for the labour market, a dropping loonie, and news about a credit downgrade? I would have thought that falling interest rates would have the reverse effect on prices, so I am very confused.
I am also curious to know what you mean by “yield-based FixedReset day” in this context?
Please forgive the questions, I am new to the world of preferred shares.
Thanks!
Basically, the current downdraft is an extension and reinforcement of the process that began slowly in December 2012, became serious at the beginning of December, 2014, when TRP.PR.A reset its dividend to 3.266%, a 29% reduction from the initial dividend, and has become a tidal wave this month.
This process consists largely of coming to the realization that FixedResets are perpetual. I made this point in May, 2008, but nobody listened. I made the same point in a one-year review published June, 2009, but nobody listened. So here we are.
In December 2012, FixedResets started trading a little bit more as if the high-spread issues would be called and the low-spread issues would be reset. This didn’t happen all at once, but the pricing models that worked just fine up until that month started looking less and less good, while the Implied Volatility model started looking better and better.
What this means in practical terms is that people are looking a lot less at the current dividend and looking forward a lot more at the anticipated reset in X years, particularly when X is less than one, but to a certain extent regardless of X.
The price drop started when the TRP.PR.A reset – a large, widely held issue – really slapped people in the face with the idea that resets were not necessarily good things. It was reinforced when the Bank of Canada cut the overnight rate on January 21 and today seems to have become a tidal wave – possibly due to month-end, but possibly also due to the labour report, which will have dampened hopes that the BoC’s course will be reversed any time soon (i.e., “X” in the preceding paragraph will have increased).
By “yield-based FixedReset day”, I just meant one that was based on market yields and expectations thereof (i.e., people are concerned about yield); the five worse days that I mentioned were credit-based (i.e., people were concerned about getting their money back).
I would have thought that falling interest rates would have the reverse effect on prices, so I am very confused.
You and me both, brother, you and me both. However, confusion is the normal state of a thoughtful market analyst, so you can now say you’re in a very small minority of players.
Falling interest rates have indeed been very good for fixed rate product, and Straight Perpetuals have done quite well over the past two months. With product that resets, the situation is a little murkier.
Prices of FixedResets should be expected to vary according to spreads, which are fixed for each issue, but will vary for each issuer according to that issuer’s creditworthiness. In the case of FixedResets, which are a perpetual product marked of Five Year Canadas, there will also be term-spread component to the spread desired by the market; that is, if five year Canadas are always 1% and credit quality was always constant, then we would expect prices to vary anyway according to whether the long term yield was 2% or 10%. This became very important in the pricing of Floaters during the Credit Crunch.
To a large extent, I don’t get this collapse. The market seems to be assuming that the GOC-5 yield will be below 1% forever and ever, which is not a feeling I share; but as happened with Floaters during the Crunch, people want every dividend to be comparable to what they’re getting on Straight Perpetuals and forget about expectations and why they bought them in the first place.
Of course, a lot of these retail guys bought them because their brokers assured them that the reset mechanism meant that the issues would always trade around $25 – give or take – and the realization that this is not exactly 100% the case has caused a fair bit of indiscriminate dumping.
A lot of this stuff is discussed monthly in my newsletter, PrefLetter, available in single issues or a year’s subscription for the low, low price of only $209.05 including tax! That’s right, only $209.05! Subscribe now!
That is a well earned couple hundred dollars right there. Heading over now!
prefnoob – enjoy the letter – I can certainly endorse it!
James, if anything this ultralow interest world could help the business performance of utilities – is it to early to backup the truck and load up with FTS, TRP etc.
Could you expand on your comment that the market seems to be assuming the GOC-5 year yield will be below 1% forever. I don’t understand why the drop in GOC yields should, in principle, cause the price of a fixed reset to drop; nor do I understand why it should be relevant, strictly speaking, whether the GOC-5 year yield remains below 1% or not.
I buy the fixed-reset, presumably, because I want the GOC-5 year yield plus a spread to compensate me for credit risk. Assuming no change in credit risk, I’m struggling to understand why price should change materially given that the security continues to do precisely what I expect of it in relation to GOC-5 year yields. To my mind, buying a fixed-reset is functionally similar to buying the GOC-5 year, holding it to maturity, and then buying it all over again. There’s no capital gain or loss, because I hold it to maturity. All I get is the coupon. The only difference with the fixed-reset is the credit risk.
Assuming a change in credit risk does not explain the fixed-reset carnage, to my mind the only explanation is that the sellers thought they were getting something akin to a perpetual or long term coupon. The problem with that explanation is that it presupposes those sellers are all idiots, which undermines its credibility.
The sad reality is that I’m usually the idiot in relation to matters such as this (and innumerable others), which is why I’d like your help understanding this better.
Thanks.
In general you can think of it in terms of Perpetual equivalency. A top credit perpetual like PWF.PR.K trading at par is yielding about 4.95% right now. The PWF.PR.T which resets at +237 needs the 5 year to trade at 2.58% right now just to break even with the Perpetual at reset. With the 5 year at around 0.70% right now.. and with PWF.PR.T not even giving you 4.95% on the current dividend (it’s giving you 4.32%).. why buy the reset when you can buy the Perpetual? Has maybe $8 to go on the downside before it’s as good as buying the Perpetual.
I don’t believe you can think of it in terms of perpetual equivalency, because there is a material difference in duration risk as between the perpetual and the fixed reset. Accordingly, you should get a higher yield for the perpetual.
In comparative terms, it seems to me that it makes sense to compare the fixed-reset yield with the five year corporate from the same issuer. There are many other issues that come into play in the relative valuation analysis James provides, but just in very basic terms this comparison makes some sense to me.
Can’t compare it to a bond because in a bond you get paid principle at maturity. In a reset, your principle is reinvested unless it’s in your interest to reinvest it, in which case the issue is called. Therefore in a reset, whenever your principle is reinvested it will be when it is against your interests because you are on the short end of optionality. Besides, you aren’t ever paid to take on duration risk. Duration is also a privilege; in an inverted yield curve environment such as Canada’s it’s a privilege you pay for.
I’m not sure how it makes sense for the PrefLetter to be reporting Modified Duration numbers for an issue like TRP.PR.A of 18.06. Duration is generally seen as the effect that a 100 basis point change in rates will have on the bond. Seems like the duration figure would make more sense if it was -18.06 for an issue like TRP.PR.A.
pugwash, welcome to the board! Yes, lower interest rates will help utilities, as will lower oil prices (because inventory won’t cost so much) … but I’m not sure how much of these projected gains are already incorporated into the common stock price. Sorry – I’m not a specialist in common!
Drew: To my mind, buying a fixed-reset is functionally similar to buying the GOC-5 year, holding it to maturity, and then buying it all over again. There’s no capital gain or loss, because I hold it to maturity. All I get is the coupon. The only difference with the fixed-reset is the credit risk.
Yes, but the critical thing is that the credit risk is perpetual – the FixedReset structure addresses only interest rate risk, it does not and cannot address credit risk.
Say, for instance, we compare a five year bond and a FixedReset from the same issuer. Now consider the situation four years and eleven months later, when the issuer starts getting into trouble. Not “immediate bankruptcy” trouble, but sales are declining, they’ve just written off an investment, all sorts of bad things are going to happen to them.
The holder of the bond doesn’t care all that much. One more month and the issue will mature, he’ll have his original investment back and he’ll be able to do what he likes with it.
The holder of the FixedReset will have to just suck it up. There has not only been a permanent impairment of his investment, but he holds a perpetual investment in the company, which could just keep sliding slowly down into oblivion. He could sell it on the market, of course, but that only moves the problem – the buyer will expect compensation for taking on that risk.
This is “Extension Risk” and it is often underestimated as a bad thing. But it’s very important.
Consider the GOC yield curve. Normally, the long end will yield more than the short end: holders of long-term bonds need to be compensated for interim price fluctuations and for the risk of intervening inflation, which is historically a much more important consideration that the potential reward that may come from deflation before maturity. There are also considerations of differing liquidity, but let’s keep it simple.
A long-term corporate investor is exposed to the same risks, so should – in principal – receive the same premium. However, there will be an extra credit risk premium, since it is much more difficult to forecast the creditworthiness of the company over thirty years than it is for five. There are also liquidity considerations, but the creditworthiness argument indicates that the corporate-government spread will be significantly wider for long-term investments than it will be for shorter-term ones.
EtienneBrule: I’m not sure how it makes sense for the PrefLetter to be reporting Modified Duration numbers for an issue like TRP.PR.A of 18.06. Duration is generally seen as the effect that a 100 basis point change in rates will have on the bond.
As discussed – and as you recognize – there are two factors in play for the price of a FixedReset. While the interest-rate sensitivity of the issue will be roughly, more or less, equivalent to a bond with a term equal to the term until the next reset, the credit-risk sensitivity will be much higher, taking into account the perpetual nature of the instrument.
What are the three most important things in fixed income investing? Credit, credit and credit. Thus I use the duration based on the perpetual nature of the credit risk of the instrument, rather than that based on the interest rate risk.
If TRP.PR.A in your example is hit by an increase in credit spreads of 100bp, what will that do to prices? Should it react more like a five year bond or a thirty?
Drew: Assuming a change in credit risk does not explain the fixed-reset carnage, to my mind the only explanation is that the sellers thought they were getting something akin to a perpetual or long term coupon. The problem with that explanation is that it presupposes those sellers are all idiots, which undermines its credibility.
Well, I can’t think of much else to explain it. Remember, we’ve seen this before – with the pricing of Floaters during the Credit Crunch as referenced above – and additionally there is very good evidence that FixedResets were trading on the basis of Current Yield as modified by an allowance for potential loss or gain on call until December 2012, when the relationship started to break down.
Additionally, there is anecdotal evidence that these things were sold on the basis they would always be within spitting distance of $25. This rather shaky hypothesis was supported explicitly by the pre-December 2012 models of pricing and continues to be supported by the very high Implied Volatilities of series of FixedResets that are near $25 – this continues to be the case for some series – look at the Implied Volatility Calculation for RY FixedResets, for example.
Market pricing has indeed changed this in a large part over the past two years, but market pricing reflects only the marginal buyer and the world is by no means as perfect and efficient as the theorists would have you believe. The 29% reduction in the widely held TRP.PR.A issue in early December 2014 woke a lot of people up. The cut in the overnight rate and resultant plunge in the GOC-5 yield got even more panic going. And now, I suspect, there is some selling that results from the simple fact that prices are going down. There is quite a lot of negative convexity in retail perceptions.
Another bit of evidence that these changes are not entirely rational results from the observation that Strong Pair relative pricing, measured on January 30, now indicates a negative average yield for three month bills over the next five years. I’m sure that somebody, somewhere, has actually thought about this and has arrived at such a conclusion; to me, it just indicates that fashions have changed and a reset is now seen as a liability rather than an asset.
A 100 basis point increase in credit spreads will impact the price of a reset much less than a 100 basis point decrease in the 5 year GOC. In fact, if a reset is trading above par or just under par, an increase in credit spreads could cause an increase in the price of the preferred.
Non-monotinic is a good word to describe resets.
Can you show me some examples? Premium, par-ish and discount?