While preparing PrefLetter I came across this interesting chart, from a presentation by BoC Deputy Governor Lynn Patterson:
Click for Big
Speaking of the BoC, the Business Outlook Survey is spreading gloom:
The quarterly survey of business executives, published by the central bank Monday, showed that the prolonged oil slump is taking a deepening toll on the mood of the country’s corporate leaders. It also shows that, increasingly, the negative impact and mounting pessimism are infecting parts of the economy beyond the resource sector.
What’s more, the details press on many of the hot buttons for the bank’s decision on interest rates, the next of which comes only days from now (Jan. 20). Spending intentions for new capacity and hiring are at their lowest since the Great Recession; businesses still have ample excess capacity; already-tepid inflation expectations are declining.
…
Neither the bond market nor the majority of economists expect a cut next week, but the Business Outlook Survey has made a cut look like a serious possibility at some point in the next few months. At least one prominent central-bank watcher – Merrill Lynch economist Emanuella Enenajor – is convinced that the survey seals the deal on a quarter-point rate cut next week.
It’s not getting any better! Oil and copper got crushed today:
Oil plunged to its lowest point since 2003 on Monday, as West Texas intermediate (WTI), the North American benchmark, declined to $31.12 (U.S.) a barrel. It has lost 15 per cent of its value in the first few days of 2016.
Copper, meanwhile, tumbled to a six-year low of $1.97 a pound. The metal, used for a wide variety of industrial and construction applications, is down more than 9 per cent in January.
… which is putting the banks under pressure:
Consider the urgency: The price of oil – exploring 12-year lows – is fast-approaching worst-case hypothetical scenarios used in bank stress tests in 2015, raising concerns about whether loan losses will spike as energy companies fail to meet their debt obligations. Big Six loans to the oil and gas sector total nearly $113-billion.
…
The lower prices are nearing, or passing through, some significant thresholds. Canadian Imperial Bank of Commerce used $30 oil in its stress tests a year ago; Bank of Montreal stress-tested its loan portfolio at $35 a barrel in 2015, and assumed that oil would recover to $50 a barrel this year.
Financial 15 Split Corp., proud issuer of FTN.PR.A, has been confirmed at Pfd-4(high) by DBRS:
DBRS Limited (DBRS) has today confirmed the rating of the Preferred Shares (the Preferred Shares) issued by Financial 15 Split Corp. (the Company) at Pfd-4 (high).
…
During 2015, the NAV of the Company has experienced some fluctuation due to volatility in the markets. Downside protection available to holders of the Preferred Shares is 40.7% as of December 15, 2015. The dividend coverage ratio has risen to 0.6 times over the past year. Regular monthly Class A Share distributions will result in an average grind of approximately 3.5% over the next five years.
Happy preferred share investors held a parade in honour of the market today!
Click for Big
It was yet another grim day for the Canadian preferred share market today, with PerpetualDiscounts off 68bp, FixedResets losing a stunning 199bp and DeemedRetractibles down 84bp. The Performance Highlights table is, of course, ridiculous. Volume was well above average.
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:
Click for Big
TRP.PR.E, which resets 2019-10-30 at +235, is bid at 17.51 to be $1.03 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $1.23 cheap at its bid price of 10.85.
Click for Big
Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 18.15 to be 0.82 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 19.25 to be 0.77 cheap.
Click for Big
The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 14.60 to be $0.99 cheap. BAM.PR.X, resetting at +180bp on 2017-6-30 is bid at 13.67 and appears to be $0.74 rich.
Click for Big
FTS.PR.K, with a spread of +205bp, and bid at 17.62, looks $0.84 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 16.51 and is $0.70 cheap.
Click for Big
Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.78%, with one outlier above 0.00%. There is one junk outlier below -2.00% and four above 0.00%.
Click for Big
Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?
| 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 | 4.70 % | 5.69 % | 27,014 | 17.02 | 1 | 1.4035 % | 1,656.8 |
| FixedFloater | 7.14 % | 6.34 % | 32,242 | 15.77 | 1 | 2.4653 % | 2,732.1 |
| Floater | 4.37 % | 4.53 % | 79,818 | 16.38 | 4 | -1.9065 % | 1,747.5 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0137 % | 2,736.1 |
| SplitShare | 4.83 % | 5.79 % | 70,997 | 1.80 | 6 | 0.0137 % | 3,201.7 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0137 % | 2,498.1 |
| Perpetual-Premium | 5.90 % | 5.81 % | 85,367 | 2.72 | 6 | -0.5476 % | 2,501.6 |
| Perpetual-Discount | 5.76 % | 5.85 % | 94,429 | 14.14 | 34 | -0.6755 % | 2,503.4 |
| FixedReset | 5.44 % | 4.82 % | 237,193 | 15.07 | 81 | -1.9911 % | 1,896.8 |
| Deemed-Retractible | 5.32 % | 5.20 % | 122,011 | 5.27 | 34 | -0.8429 % | 2,531.0 |
| FloatingReset | 2.89 % | 4.79 % | 62,006 | 5.60 | 13 | -0.6169 % | 2,044.3 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| TRP.PR.A | FixedReset | -7.26 % | Not real. The issue traded 5,880 shares today in a range of 15.18-84 before closing at 14.56-24, 1×1. The last trade of the day was at 2:17pm, at 15.18. I have not checked whether this lamentable state of affairs is due to inadequate Toronto Stock Exchange reporting or inadequate Toronto Stock Exchange supervision of market-makers. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 14.56 Evaluated at bid price : 14.56 Bid-YTW : 4.70 % |
| BAM.PF.E | FixedReset | -5.34 % | Sort of real. The issue traded 10,590 shares today in a range of 17.36-33 before closing at 17.36-60, 4×1. The VWAP was 17.68. We’ll give the Exchange and the market maker a pass on this one, largely because I’m such a nice guy. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 17.36 Evaluated at bid price : 17.36 Bid-YTW : 5.05 % |
| TRP.PR.H | FloatingReset | -5.23 % | Reasonably real. The issue traded 8,659 shares in a range of 9.26-80 before closing at 9.25-75, 4×1. VWAP was 9.68. But really, guys a 5%+ quote spread? I have not checked whether this lamentable state of affairs is due to inadequate Toronto Stock Exchange reporting or inadequate Toronto Stock Exchange supervision of market-makers. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 9.25 Evaluated at bid price : 9.25 Bid-YTW : 4.65 % |
| HSE.PR.C | FixedReset | -5.14 % | Exaggerated. The issue traded 9,300 shares in a range of 16.62-17.95 before closing at 16.79-50, 2×30. VWAP was 17.28; the last trade was at 17.02 for 100 shares, timestamped 2:50pm. I have not checked whether this lamentable state of affairs is due to inadequate Toronto Stock Exchange reporting or inadequate Toronto Stock Exchange supervision of market-makers. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 16.79 Evaluated at bid price : 16.79 Bid-YTW : 5.94 % |
| BAM.PR.T | FixedReset | -5.09 % | Well, OK. The issue traded 13,600 shares today in a range of 15.01-91 before closing at 15.11-30, 5×2. VWAP was 15.49; the last trade was for 500 shares at 15.12 timestamped 3:48. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 15.11 Evaluated at bid price : 15.11 Bid-YTW : 5.10 % |
| BAM.PF.A | FixedReset | -4.62 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 18.60 Evaluated at bid price : 18.60 Bid-YTW : 5.00 % |
| BAM.PR.K | Floater | -4.44 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 10.12 Evaluated at bid price : 10.12 Bid-YTW : 4.70 % |
| BAM.PF.F | FixedReset | -4.33 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 19.02 Evaluated at bid price : 19.02 Bid-YTW : 4.92 % |
| TRP.PR.E | FixedReset | -4.32 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 17.51 Evaluated at bid price : 17.51 Bid-YTW : 4.65 % |
| HSE.PR.G | FixedReset | -4.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 18.00 Evaluated at bid price : 18.00 Bid-YTW : 6.01 % |
| BAM.PR.R | FixedReset | -3.82 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 14.60 Evaluated at bid price : 14.60 Bid-YTW : 5.16 % |
| TRP.PR.D | FixedReset | -3.81 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 16.65 Evaluated at bid price : 16.65 Bid-YTW : 4.82 % |
| BAM.PR.X | FixedReset | -3.73 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 13.67 Evaluated at bid price : 13.67 Bid-YTW : 4.82 % |
| MFC.PR.H | FixedReset | -3.53 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.50 Bid-YTW : 6.65 % |
| PWF.PR.P | FixedReset | -3.47 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 12.81 Evaluated at bid price : 12.81 Bid-YTW : 4.41 % |
| BAM.PF.G | FixedReset | -3.38 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 18.86 Evaluated at bid price : 18.86 Bid-YTW : 4.99 % |
| BAM.PF.B | FixedReset | -3.31 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 17.50 Evaluated at bid price : 17.50 Bid-YTW : 4.96 % |
| IFC.PR.A | FixedReset | -3.27 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 14.80 Bid-YTW : 9.82 % |
| BMO.PR.M | FixedReset | -3.25 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.25 Bid-YTW : 4.21 % |
| FTS.PR.G | FixedReset | -3.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 16.51 Evaluated at bid price : 16.51 Bid-YTW : 4.51 % |
| SLF.PR.H | FixedReset | -3.16 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 15.65 Bid-YTW : 9.11 % |
| TRP.PR.C | FixedReset | -3.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 10.85 Evaluated at bid price : 10.85 Bid-YTW : 5.07 % |
| CM.PR.Q | FixedReset | -2.95 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 18.75 Evaluated at bid price : 18.75 Bid-YTW : 4.65 % |
| GWO.PR.N | FixedReset | -2.93 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 12.91 Bid-YTW : 10.56 % |
| HSE.PR.A | FixedReset | -2.79 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 10.81 Evaluated at bid price : 10.81 Bid-YTW : 5.56 % |
| MFC.PR.N | FixedReset | -2.74 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.10 Bid-YTW : 7.77 % |
| SLF.PR.B | Deemed-Retractible | -2.74 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.59 Bid-YTW : 7.60 % |
| TRP.PR.B | FixedReset | -2.74 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 10.66 Evaluated at bid price : 10.66 Bid-YTW : 4.69 % |
| FTS.PR.J | Perpetual-Discount | -2.71 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 21.21 Evaluated at bid price : 21.21 Bid-YTW : 5.68 % |
| SLF.PR.C | Deemed-Retractible | -2.69 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.50 Bid-YTW : 7.97 % |
| TRP.PR.G | FixedReset | -2.66 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 19.03 Evaluated at bid price : 19.03 Bid-YTW : 4.87 % |
| SLF.PR.A | Deemed-Retractible | -2.64 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.62 Bid-YTW : 7.52 % |
| PWF.PR.S | Perpetual-Discount | -2.63 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 20.40 Evaluated at bid price : 20.40 Bid-YTW : 5.90 % |
| BMO.PR.Q | FixedReset | -2.60 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.10 Bid-YTW : 6.97 % |
| BNS.PR.P | FixedReset | -2.56 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.58 Bid-YTW : 4.01 % |
| MFC.PR.M | FixedReset | -2.53 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.50 Bid-YTW : 7.54 % |
| BMO.PR.S | FixedReset | -2.43 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 18.05 Evaluated at bid price : 18.05 Bid-YTW : 4.44 % |
| MFC.PR.C | Deemed-Retractible | -2.42 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.76 Bid-YTW : 7.87 % |
| BAM.PR.Z | FixedReset | -2.40 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 18.70 Evaluated at bid price : 18.70 Bid-YTW : 5.04 % |
| SLF.PR.E | Deemed-Retractible | -2.33 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.68 Bid-YTW : 7.90 % |
| MFC.PR.J | FixedReset | -2.31 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.00 Bid-YTW : 7.19 % |
| BNS.PR.Q | FixedReset | -2.29 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.04 Bid-YTW : 4.44 % |
| BNS.PR.R | FixedReset | -2.29 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.52 Bid-YTW : 4.32 % |
| TD.PF.D | FixedReset | -2.28 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 18.85 Evaluated at bid price : 18.85 Bid-YTW : 4.62 % |
| GWO.PR.S | Deemed-Retractible | -2.24 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.58 Bid-YTW : 6.14 % |
| SLF.PR.I | FixedReset | -2.21 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.11 Bid-YTW : 7.84 % |
| CM.PR.P | FixedReset | -2.21 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 17.28 Evaluated at bid price : 17.28 Bid-YTW : 4.47 % |
| IFC.PR.C | FixedReset | -2.19 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 17.90 Bid-YTW : 7.88 % |
| CIU.PR.C | FixedReset | -2.18 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 11.65 Evaluated at bid price : 11.65 Bid-YTW : 4.43 % |
| TD.PR.S | FixedReset | -2.16 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.50 Bid-YTW : 3.85 % |
| MFC.PR.I | FixedReset | -2.09 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.65 Bid-YTW : 7.00 % |
| CU.PR.F | Perpetual-Discount | -2.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 19.66 Evaluated at bid price : 19.66 Bid-YTW : 5.81 % |
| MFC.PR.B | Deemed-Retractible | -2.09 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.13 Bid-YTW : 7.78 % |
| FTS.PR.M | FixedReset | -2.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 18.76 Evaluated at bid price : 18.76 Bid-YTW : 4.50 % |
| TD.PF.C | FixedReset | -1.99 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 17.27 Evaluated at bid price : 17.27 Bid-YTW : 4.47 % |
| SLF.PR.G | FixedReset | -1.96 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 14.02 Bid-YTW : 9.58 % |
| BMO.PR.W | FixedReset | -1.96 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 17.53 Evaluated at bid price : 17.53 Bid-YTW : 4.43 % |
| IAG.PR.A | Deemed-Retractible | -1.92 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.40 Bid-YTW : 7.50 % |
| PWF.PR.H | Perpetual-Premium | -1.87 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 23.89 Evaluated at bid price : 24.14 Bid-YTW : 5.96 % |
| BAM.PR.C | Floater | -1.81 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 10.30 Evaluated at bid price : 10.30 Bid-YTW : 4.62 % |
| GWO.PR.P | Deemed-Retractible | -1.73 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.29 Bid-YTW : 6.48 % |
| TD.PF.B | FixedReset | -1.67 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 17.65 Evaluated at bid price : 17.65 Bid-YTW : 4.37 % |
| CM.PR.O | FixedReset | -1.64 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 18.00 Evaluated at bid price : 18.00 Bid-YTW : 4.39 % |
| SLF.PR.D | Deemed-Retractible | -1.62 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.48 Bid-YTW : 7.98 % |
| RY.PR.I | FixedReset | -1.61 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.27 Bid-YTW : 4.51 % |
| CU.PR.G | Perpetual-Discount | -1.59 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 19.76 Evaluated at bid price : 19.76 Bid-YTW : 5.78 % |
| BMO.PR.Y | FixedReset | -1.53 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 19.30 Evaluated at bid price : 19.30 Bid-YTW : 4.55 % |
| HSE.PR.E | FixedReset | -1.52 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 18.10 Evaluated at bid price : 18.10 Bid-YTW : 5.98 % |
| GWO.PR.R | Deemed-Retractible | -1.47 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.80 Bid-YTW : 7.45 % |
| RY.PR.J | FixedReset | -1.46 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 18.94 Evaluated at bid price : 18.94 Bid-YTW : 4.60 % |
| BIP.PR.B | FixedReset | -1.42 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 22.62 Evaluated at bid price : 23.66 Bid-YTW : 5.84 % |
| CU.PR.E | Perpetual-Discount | -1.39 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 21.23 Evaluated at bid price : 21.23 Bid-YTW : 5.86 % |
| TD.PR.T | FloatingReset | -1.38 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.40 Bid-YTW : 4.71 % |
| FTS.PR.F | Perpetual-Discount | -1.34 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 21.86 Evaluated at bid price : 22.10 Bid-YTW : 5.61 % |
| IAG.PR.G | FixedReset | -1.22 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.50 Bid-YTW : 7.02 % |
| GWO.PR.H | Deemed-Retractible | -1.18 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.00 Bid-YTW : 7.37 % |
| TD.PF.A | FixedReset | -1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 17.78 Evaluated at bid price : 17.78 Bid-YTW : 4.35 % |
| SLF.PR.J | FloatingReset | -1.16 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 12.75 Bid-YTW : 10.32 % |
| BMO.PR.T | FixedReset | -1.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 17.51 Evaluated at bid price : 17.51 Bid-YTW : 4.47 % |
| BNS.PR.Z | FixedReset | -1.10 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.85 Bid-YTW : 7.11 % |
| BMO.PR.R | FloatingReset | -1.09 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.76 Bid-YTW : 4.56 % |
| BAM.PF.C | Perpetual-Discount | -1.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 19.98 Evaluated at bid price : 19.98 Bid-YTW : 6.13 % |
| GWO.PR.I | Deemed-Retractible | -1.04 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.00 Bid-YTW : 7.67 % |
| CU.PR.D | Perpetual-Discount | -1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 21.33 Evaluated at bid price : 21.33 Bid-YTW : 5.83 % |
| GWO.PR.G | Deemed-Retractible | -1.01 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.45 Bid-YTW : 6.79 % |
| POW.PR.D | Perpetual-Discount | -1.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 21.32 Evaluated at bid price : 21.59 Bid-YTW : 5.81 % |
| RY.PR.M | FixedReset | -1.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 18.81 Evaluated at bid price : 18.81 Bid-YTW : 4.52 % |
| GWO.PR.F | Deemed-Retractible | 1.11 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2016-02-10 Maturity Price : 25.00 Evaluated at bid price : 25.40 Bid-YTW : -10.98 % |
| BAM.PR.E | Ratchet | 1.40 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 25.00 Evaluated at bid price : 14.45 Bid-YTW : 5.69 % |
| RY.PR.K | FloatingReset | 1.87 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.75 Bid-YTW : 4.87 % |
| BAM.PR.G | FixedFloater | 2.47 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 25.00 Evaluated at bid price : 13.30 Bid-YTW : 6.34 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BNS.PR.Z | FixedReset | 218,179 | Scotia crossed 100,000 at 19.06. RBC crossed 50,000 at the same price. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.85 Bid-YTW : 7.11 % |
| BNS.PR.L | Deemed-Retractible | 209,671 | RBC crossed 192,000 at 24.54. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.46 Bid-YTW : 4.90 % |
| MFC.PR.I | FixedReset | 103,000 | Nesbitt crossed 100,000 at 19.93. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.65 Bid-YTW : 7.00 % |
| RY.PR.C | Deemed-Retractible | 73,612 | RBC crossed 50,000 at 24.89, then bought 13,900 at the same price from TD. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.83 Bid-YTW : 4.87 % |
| TD.PF.C | FixedReset | 55,135 | Scotia crossed 40,000 at 17.50. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 17.27 Evaluated at bid price : 17.27 Bid-YTW : 4.47 % |
| BMO.PR.T | FixedReset | 51,827 | TD crossed 25,700 at 17.80. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-11 Maturity Price : 17.51 Evaluated at bid price : 17.51 Bid-YTW : 4.47 % |
| There were 42 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| BNS.PR.R | FixedReset | Quote: 23.52 – 24.49 Spot Rate : 0.9700 Average : 0.5572 YTW SCENARIO |
| BMO.PR.M | FixedReset | Quote: 23.25 – 24.00 Spot Rate : 0.7500 Average : 0.4770 YTW SCENARIO |
| CIU.PR.C | FixedReset | Quote: 11.65 – 12.90 Spot Rate : 1.2500 Average : 0.9946 YTW SCENARIO |
| TRP.PR.A | FixedReset | Quote: 14.56 – 15.24 Spot Rate : 0.6800 Average : 0.4286 YTW SCENARIO |
| HSE.PR.C | FixedReset | Quote: 16.79 – 17.50 Spot Rate : 0.7100 Average : 0.4596 YTW SCENARIO |
| TD.PR.T | FloatingReset | Quote: 21.40 – 22.04 Spot Rate : 0.6400 Average : 0.4292 YTW SCENARIO |
Watching the prefs drop this fast in January is painful. Looks like tax-loss selling is starting really early this year, eh?
Seriously, though, I’m wondering if the action might be related to the rapidly dropping loonie, triggered by US investors wanting out of Canadian stocks asap before the loonie hits 65 cents again.
James, any idea how popular the Canadian prefs are/were south of the border, and if this might be a factor in the recent volatility?
It seems like everything that was disliked last year has gotten hammered already this year. CA 5YR rates are on their lows, 40 bps lower than early Dec – this has to be a confounding factor for the resets. Are prefs trying to price in another rate cut this year? Aside from that, if the best issuers need to attach a 550 bp coupon, does that not suggest that the pref market should be at that level in general (lets assume new issues give up a small premium)?
This move down really took me by surprise, but now I’m not sure it should have been such a surprise. I’m more surprised that fixed rate perpetuals have gotten hit so hard – resets make a little more sense in hindsight. With emerging market insecurity, commodity weakness, CAD weakness and risks due to shadow rate moves and fed tightening (http://themacrotourist.com/blog/2016/01/04/the-90210-kush-loving-weirdo-might-be-onto-something/), do the prefs deserve a wider risk premium, or is this too far?
James, any idea how popular the Canadian prefs are/were south of the border, and if this might be a factor in the recent volatility?
There are always some aficionados, but I don’t think – based on not very much evidence, admittedly – that it’s a particularly big factor.
I base this on the lack of success of Canadian preferred share ETFs and the relative paucity of Canadian USD issues, both of which I would expect to be more popular if US investor demand was a major factor; good data is simply not available to me.
Aside from that, if the best issuers need to attach a 550 bp coupon, does that not suggest that the pref market should be at that level in general (lets assume new issues give up a small premium)?
No, not really. There’s a big, big, big call premium embedded in the price of most near-par preferred share issues, which shows up in the calculation of Implied Volatility. As I have previously suggested, I think there’s a confounding factor in the calculation: as price declines the call premium becomes less important, but the leverage to the GOC-5 rate becomes more important; i.e., people are not really paying so much for the mitigation of call risk, they’re paying for leverage.
I’m more surprised that fixed rate perpetuals have gotten hit so hard
I think that’s what happening there is that Straight Perpetual yields are being pushed up by FixedReset yields; the market demands extra yield for holding a Straight, even if that makes no sense in the context of why FixedResets are getting hammered. That’s sheer speculation, though.
The “90210 kush loving” weirdo might be onto something
Great link, but I disagree with the reasoning there. The author claims that the tightening cycle will be average, even though the loosening cycle (as measured by the Wu-Xia Shadow Federal Funds Rate was a lot more dramatic than average.
This could happen if we have moved into a new paradigm of lower yields, but I find it very hard to believe that the long-term equilibrium for the Fed rate is 175bp below inflation.
do the prefs deserve a wider risk premium, or is this too far?
I think the liquidity premium for preferreds is currently way too high (I don’t like using the phrase ‘risk premium’, it’s too imprecise). As I have pointed out, Straights now have a 330bp+ interest-equivalent yield spread over long-term corporates and FixedResets are near all-time highs over five-year Canadas.
I think these crazy high spreads will narrow … but I can’t tell you, unfortunately, just how the unsustainable situation will be resolved, or when the resolution will occur.
James,
If the liquidity premium is a major driver in the increased spread, why wouldn’t it also apply to the long-term corporates to which it is referenced, and hence (at least partially) cancel out?
“There’s a big, big, big call premium embedded in the price of most near-par preferred share issues, which shows up in the calculation of Implied Volatility.”
I apologize for my ignorance, but I don’t understand what you mean.
“as price declines the call premium becomes less important, but the leverage to the GOC-5 rate becomes more important; i.e., people are not really paying so much for the mitigation of call risk, they’re paying for leverage.”
I guess I don’t get this part either, as I don’t understand the first part…
If the liquidity premium is a major driver in the increased spread, why wouldn’t it also apply to the long-term corporates to which it is referenced, and hence (at least partially) cancel out?
It does (partially) cancel out; the liquidity premium is a major component of long corporate yields see Credit Spreads and Default Risk.
One important factor inflating the liquidity premium for preferred shares is the easy-to-measure kind of liquidity: you can transact $1-million in corporate bonds with one ‘phone call … preferred shares, not so much.
There are also things like a higher degree of risk aversion for the retail investors who make up the preferred share market and a different way of measuring risk (‘Has it gone down since the last time I looked at my statement?’).
There’s a big, big, big call premium embedded in the price of most near-par preferred share issues, which shows up in the calculation of Implied Volatility
I recently published an Implied Volatility for the TD series of FixedResets in the post NA.PR.X Soft on Decent Volume.
You will see that the recent TD issue, TD.PF.G, resetting at +466, is a little expensive, bid at 25.34 for an Expected Future Current Yield (EFCY) of 5.34%, vs. a theoretical level (determined by the calculation) of 25.12, with an EFCY of 5.38%.
However, the “Spread” in that calculation is 359bp, implying that (theoretically!) TD could issue a perpetual annuity (with all the same features as TD.PF.G, but neither redeemable nor retractible) at 359bp over GOC-5, or 3.59%+0.75% = 4.29%.
The calculation indicates that such an instrument would trade at 31.16.
So the theoretical price of TD.PF.G is the arithmetic sum of the perpetual annuity price of 31.16 less the option value of 6.04.
as price declines the call premium becomes less important
For the lowest spread issue, TD.PF.A, resetting at +224, the value of the perpetual annuity is 17.22 but the value of the embedded call option is only ($0.43), for a net theoretical price of $16.79.
the leverage to the GOC-5 rate becomes more important
Say we have something trading at 12.50, exactly 50% of par.
If the GOC-5 yield goes up by 1bp, then the dividend paid on this issue will go up 1bp (expected, on reset), but the dividend is calculated on par value of the issue, not the trading price.
Thus, the EFCY of the issue will increase by 2bp.
The lower the price of the issue, the better an increase in GOC-5 is for you (and, of course, the worse a decrease in GOC-5 is for you).
I apologize again for all my questions, but I really want to understand this.
“However, the ‘Spread’ in that calculation is 359bp”
Is this derived from your implied volatility calculations? I’ve tried to get through it (in one of your articles) but it doesn’t make much sense to me.
“implying that (theoretically!) TD could issue a perpetual annuity (with all the same features as TD.PF.G, but neither redeemable nor retractible) at 359bp over GOC-5, or 3.59%+0.75% = 4.29%.”
Why does it imply that?
“The calculation indicates that such an instrument would trade at 31.16.”
Again, where dose that come from?
“So the theoretical price of TD.PF.G is the arithmetic sum of the perpetual annuity price of 31.16 less the option value of 6.04.
Understood.
“For the lowest spread issue, TD.PF.A, resetting at +224, the value of the perpetual annuity is 17.22 but the value of the embedded call option is only ($0.43), for a net theoretical price of $16.79.”
Where do these values cone from?
“the leverage to the GOC-5 rate becomes more important”
All the rest makes sense to me. Thanks again!
Is this derived from your implied volatility calculations? I’ve tried to get through it (in one of your articles) but it doesn’t make much sense to me.
It would be best if you worked through the article I wrote and posted questions on the thread about that article.
Will do.