You know what makes me laugh? Idiotic PMs getting burned by reality makes me laugh:
Great West on April 15 opted not to exercise an option to payback one of its U.S. dollar bonds early. That means the money Great West borrowed in 2006 doesn’t have to be paid back until 2046, and — because the interest goes from fixed- to floating-rate — lenders face coupon payments being cut by more than half if market rates stay where they are.
Now investors are wondering if C$45 billion ($35 billion) more lent to the country’s financial sector could share the same fate.
…
Investors say the move by Great West is a rare example of a Canadian financial institution opting not to exercise an early-call option on that kind of fixed-to-floating rate note. It has them wondering if the C$45 billion Canadians lent in their own country under similar terms might also lock buyers in much longer than they bargained for if the floating rate starts to look like a better deal than what a company could get if it borrowed fresh today.Investors’ fears are manifesting themselves in the market where bonds, originally priced assuming they’d be called, are adjusting to the possibility of the longer term. Great West’s U.S. dollar note saw the yield investors demand to hold it to the call date almost triple after the insurer opted not to call, according to data compiled by Bloomberg.
Another Great West note, this one denominated in Canadian dollars with a year to go before its call date, saw its yield to the call date go from 2.4 percent to 7.1 percent as investors increased the odds it could be extended as well. If it isn’t called, those C$1 billion in notes don’t have to be paid back until 2067.
“Canadian investors never believed a Canadian bank or issuer would do that kind of thing in Canada,” Marc Goldfried, who manages C$3.5 billion as chief investment officer at Canoe Financial LP in Toronto.
The bond in question is described as Great-West Life & Annuity Insurance Capital LP II, subordinated debentures due May 16, 2046, bearing an interest rate of 7.153% until May 16, 2016 and thereafter a rate of 2.538% plus the three month LIBOR rate, unsecured.
The bond that has everybody worried – dropping a bit more than 4.5% on the day according to the story – is Great-West Lifeco Finance (Delaware) LP, Subordinated Debentures due June 21, 2067, bearing an interest rate of 5.691% until June 21, 2017 and, thereafter, at a rate equal to the Canadian 90-day Bankers’ Acceptance Rate plus 1.49%, unsecured.
What’s that I hear? Some Assiduous But Not Assiduous Enough Reader at the back of the room snickering that he doesn’t have to worry about this because he’s got all his money invested in short term ETFs? Let’s have a look at the holdings of ZCS – BMO Short Corporate Bond Index ETF:
| Weight (%) | Name | ISIN | Base Market Value |
| … | |||
| 0.64% | Gr-W Fx/Fl 5.691 21Jun67 | CA391382AA68 | 5,922,666 |
That’s right, it’s held in the very first short-term corporate bond ETF I looked at. I warned about this insanity in my article Bond ETFs demystified; holdings of sub-debt in short-term index funds is quite common. I have also warned against OSFI’s desire to get CoCos included in the bond indices. But nobody ever listens to me. This problem, by the way, will become even more severe once ‘Bail-in’ bonds start coming out in quantity; I have every confidence that the unparalleled genius of Canadian regulators, index compositors, ETF merchandizers and salesmen will be thrilled to hold that stuff in short-term bond indices.
Anyway, today’s bare-bones preferred share market report is:
| 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 | 4.66 % | 5.67 % | 9,931 | 17.06 | 1 | 4.3165 % | 1,687.1 |
| FixedFloater | 6.55 % | 5.66 % | 20,056 | 16.95 | 1 | 0.6944 % | 3,084.7 |
| Floater | 4.52 % | 4.68 % | 55,150 | 16.08 | 4 | 1.2101 % | 1,712.8 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0531 % | 2,804.6 |
| SplitShare | 4.72 % | 5.05 % | 88,658 | 2.54 | 6 | -0.0531 % | 3,281.9 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0531 % | 2,560.7 |
| Perpetual-Premium | 5.78 % | -10.60 % | 89,678 | 0.08 | 6 | 0.0593 % | 2,590.2 |
| Perpetual-Discount | 5.56 % | 5.60 % | 92,972 | 14.48 | 33 | -0.0586 % | 2,625.7 |
| FixedReset | 5.16 % | 4.67 % | 178,608 | 14.14 | 87 | -0.0976 % | 1,973.8 |
| Deemed-Retractible | 5.18 % | 5.58 % | 126,863 | 5.07 | 34 | 0.0124 % | 2,632.6 |
| FloatingReset | 3.15 % | 4.82 % | 34,449 | 5.36 | 17 | -0.2474 % | 2,067.3 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BNS.PR.F | FloatingReset | -3.94 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.51 Bid-YTW : 7.45 % |
| TRP.PR.A | FixedReset | -3.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-04-19 Maturity Price : 14.35 Evaluated at bid price : 14.35 Bid-YTW : 4.94 % |
| BAM.PR.Z | FixedReset | -2.43 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-04-19 Maturity Price : 18.85 Evaluated at bid price : 18.85 Bid-YTW : 5.13 % |
| TRP.PR.C | FixedReset | -2.16 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-04-19 Maturity Price : 11.35 Evaluated at bid price : 11.35 Bid-YTW : 5.08 % |
| CM.PR.O | FixedReset | -1.79 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-04-19 Maturity Price : 18.66 Evaluated at bid price : 18.66 Bid-YTW : 4.36 % |
| BAM.PR.T | FixedReset | -1.74 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-04-19 Maturity Price : 15.82 Evaluated at bid price : 15.82 Bid-YTW : 5.02 % |
| HSE.PR.G | FixedReset | -1.44 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-04-19 Maturity Price : 19.20 Evaluated at bid price : 19.20 Bid-YTW : 5.75 % |
| VNR.PR.A | FixedReset | -1.37 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-04-19 Maturity Price : 18.05 Evaluated at bid price : 18.05 Bid-YTW : 5.08 % |
| BAM.PR.X | FixedReset | -1.29 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-04-19 Maturity Price : 14.56 Evaluated at bid price : 14.56 Bid-YTW : 4.67 % |
| BAM.PF.F | FixedReset | -1.25 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-04-19 Maturity Price : 19.75 Evaluated at bid price : 19.75 Bid-YTW : 4.85 % |
| BAM.PF.G | FixedReset | -1.23 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-04-19 Maturity Price : 20.12 Evaluated at bid price : 20.12 Bid-YTW : 4.78 % |
| TD.PF.B | FixedReset | 1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-04-19 Maturity Price : 18.85 Evaluated at bid price : 18.85 Bid-YTW : 4.23 % |
| TRP.PR.B | FixedReset | 1.19 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-04-19 Maturity Price : 11.05 Evaluated at bid price : 11.05 Bid-YTW : 4.73 % |
| TRP.PR.H | FloatingReset | 1.27 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-04-19 Maturity Price : 9.59 Evaluated at bid price : 9.59 Bid-YTW : 4.68 % |
| BAM.PR.C | Floater | 1.31 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-04-19 Maturity Price : 10.05 Evaluated at bid price : 10.05 Bid-YTW : 4.74 % |
| PWF.PR.A | Floater | 2.22 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-04-19 Maturity Price : 11.50 Evaluated at bid price : 11.50 Bid-YTW : 4.16 % |
| TRP.PR.G | FixedReset | 2.61 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-04-19 Maturity Price : 18.50 Evaluated at bid price : 18.50 Bid-YTW : 5.14 % |
| PWF.PR.Q | FloatingReset | 4.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-04-19 Maturity Price : 11.87 Evaluated at bid price : 11.87 Bid-YTW : 4.42 % |
| BAM.PR.E | Ratchet | 4.32 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-04-19 Maturity Price : 25.00 Evaluated at bid price : 14.50 Bid-YTW : 5.67 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| TD.PF.G | FixedReset | 186,200 | YTW SCENARIO Maturity Type : Call Maturity Date : 2021-04-30 Maturity Price : 25.00 Evaluated at bid price : 26.00 Bid-YTW : 4.59 % |
| BNS.PR.Z | FixedReset | 126,800 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.51 Bid-YTW : 5.77 % |
| RY.PR.Q | FixedReset | 112,744 | YTW SCENARIO Maturity Type : Call Maturity Date : 2021-05-24 Maturity Price : 25.00 Evaluated at bid price : 26.49 Bid-YTW : 4.62 % |
| FTS.PR.M | FixedReset | 82,352 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-04-19 Maturity Price : 19.00 Evaluated at bid price : 19.00 Bid-YTW : 4.56 % |
| CU.PR.F | Perpetual-Discount | 55,740 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-04-19 Maturity Price : 20.47 Evaluated at bid price : 20.47 Bid-YTW : 5.58 % |
| RY.PR.J | FixedReset | 46,100 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-04-19 Maturity Price : 20.16 Evaluated at bid price : 20.16 Bid-YTW : 4.44 % |
| There were 23 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| CM.PR.O | FixedReset | Quote: 18.66 – 19.80 Spot Rate : 1.1400 Average : 0.6873 YTW SCENARIO |
| GWO.PR.N | FixedReset | Quote: 13.30 – 14.15 Spot Rate : 0.8500 Average : 0.6060 YTW SCENARIO |
| TRP.PR.E | FixedReset | Quote: 17.50 – 18.13 Spot Rate : 0.6300 Average : 0.4060 YTW SCENARIO |
| BAM.PF.F | FixedReset | Quote: 19.75 – 20.25 Spot Rate : 0.5000 Average : 0.3453 YTW SCENARIO |
| ALB.PR.C | SplitShare | Quote: 26.00 – 26.90 Spot Rate : 0.9000 Average : 0.7492 YTW SCENARIO |
| PWF.PR.T | FixedReset | Quote: 20.60 – 21.24 Spot Rate : 0.6400 Average : 0.5036 YTW SCENARIO |