American preferreds are doing really well:
A kind of buying panic has broken out. The iShares U.S. Preferred Stock exchange-traded fund, which seeks to track the market, has taken in $2.2 billion in new money so far this year. Historically, the price of preferred stocks almost never rises, with virtually all their return coming from the fixed dividend rates they offer; this year, however, nearly half the 7% total return of the S&P preferred index has come from climbing prices.
To see why overheating could be a risk, it helps to understand more about how preferred stocks work.
…
There’s another concern. At the end of last year, the iShares fund held more than 10% of the total outstanding value of 37 of its holdings. As of Aug. 10, according to FactSet, the fund owns more than 10% of the outstanding value of 185 of its holdings. (It has a total of 293 positions.) That’s a lot of any market for a single fund to control in such a hurry.Take a recent study by Fed economist Jeremy Nalewaik, who found that while inflation expectations and actual inflation were closely connected prior to the mid-1990s, the relationship has deteriorated markedly since then.
The hardest thing to deal with in investment management is regime switching:
“Movements in inflation expectations now appear inconsequential since they no longer have any predictive content for subsequent inflation realizations,” Nalewaik wrote.
He cites as a potential explanation for this a hypothesis offered in a 2000 paper co-authored by Yellen’s husband, Nobel prize-winner George Akerlof, who wrote that “when inflation is low, it may be at most a marginal factor in wage and price decisions, and decision-makers may ignore it entirely.”
Akerlof’s and Nalewaik’s research jibe nicely with ideas that St. Louis Fed President James Bullard has injected into the debate on the rate-setting Federal Open Market Committee this year.
Bullard stopped submitting longer-run economic forecasts when the latest round of policy makers’ projections was compiled in mid-June, stating in a June 30 speech that “the timing of a switch to an alternative regime is viewed as not forecastable, and so we simply forecast that the current regime will persist.”
Nalewaik suggests that a return to a world in which inflation expectations and actual inflation become more tightly linked, as they were before the mid-1990s, may not be in the cards.
There are concerns that Gilts are distorting the global bond market:
The rally in gilts has been extraordinary, with the yield on the U.K.’s longest-dated bond, the 2068 maturity, almost halving from 2% on the day of the referendum to 1.06% on Thursday.
The price of the bond is up 53% this year, the sort of gains usually produced by risky stocks, not rock-solid government paper. (Its performance roughly equals the gains of sixth-best stock in the S&P 500, Range Resources.)
“This is not normal,” said Mike Amey, who manages sterling bond portfolios for fund manager Pimco. He called the speed of the move “eye-popping.”
The 18.8% two-month return on the 30-year gilt has been bettered only during the rescue of hedge fund Long-Term Capital Management in 1998, according to Thomson Reuters data since the late 1980s.
The result has been that falling gilt yields have taken over from Japanese government bonds in exerting downward pressure on Treasurys and other global bond markets.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.4258 % | 1,688.2 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.4258 % | 3,084.0 |
| Floater | 4.86 % | 4.60 % | 81,392 | 16.08 | 4 | -0.4258 % | 1,777.3 |
| OpRet | 4.84 % | 2.42 % | 50,342 | 0.08 | 1 | 0.0000 % | 2,847.0 |
| SplitShare | 5.04 % | 4.74 % | 106,164 | 2.26 | 5 | 0.1985 % | 3,414.5 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1985 % | 2,664.1 |
| Perpetual-Premium | 5.44 % | -12.81 % | 73,821 | 0.09 | 12 | -0.1350 % | 2,705.4 |
| Perpetual-Discount | 5.10 % | 4.99 % | 105,264 | 14.97 | 26 | -0.1068 % | 2,915.1 |
| FixedReset | 4.89 % | 4.09 % | 152,705 | 7.16 | 89 | -0.2012 % | 2,085.9 |
| Deemed-Retractible | 4.96 % | -0.01 % | 120,194 | 0.09 | 32 | -0.1627 % | 2,814.3 |
| FloatingReset | 2.88 % | 4.11 % | 34,635 | 5.11 | 11 | -0.2195 % | 2,202.4 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BAM.PR.Z | FixedReset | -1.74 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-08-12 Maturity Price : 19.80 Evaluated at bid price : 19.80 Bid-YTW : 4.67 % |
| SLF.PR.J | FloatingReset | -1.47 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 13.40 Bid-YTW : 10.32 % |
| BAM.PR.X | FixedReset | -1.21 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-08-12 Maturity Price : 13.93 Evaluated at bid price : 13.93 Bid-YTW : 4.51 % |
| BAM.PF.G | FixedReset | -1.15 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-08-12 Maturity Price : 21.41 Evaluated at bid price : 21.41 Bid-YTW : 4.31 % |
| BAM.PF.E | FixedReset | -1.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-08-12 Maturity Price : 19.98 Evaluated at bid price : 19.98 Bid-YTW : 4.30 % |
| SLF.PR.A | Deemed-Retractible | -1.09 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.44 Bid-YTW : 5.19 % |
| CM.PR.Q | FixedReset | -1.08 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-08-12 Maturity Price : 21.11 Evaluated at bid price : 21.11 Bid-YTW : 4.08 % |
| W.PR.H | Perpetual-Discount | -1.03 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-08-12 Maturity Price : 24.82 Evaluated at bid price : 25.04 Bid-YTW : 5.55 % |
| TRP.PR.A | FixedReset | 1.46 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-08-12 Maturity Price : 15.25 Evaluated at bid price : 15.25 Bid-YTW : 4.40 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BIP.PR.C | FixedReset | 139,090 | YTW SCENARIO Maturity Type : Call Maturity Date : 2021-09-30 Maturity Price : 25.00 Evaluated at bid price : 25.37 Bid-YTW : 5.09 % |
| BMO.PR.T | FixedReset | 125,320 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-08-12 Maturity Price : 19.00 Evaluated at bid price : 19.00 Bid-YTW : 3.94 % |
| FTS.PR.M | FixedReset | 46,767 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-08-12 Maturity Price : 20.25 Evaluated at bid price : 20.25 Bid-YTW : 4.07 % |
| RY.PR.Q | FixedReset | 33,975 | YTW SCENARIO Maturity Type : Call Maturity Date : 2021-05-24 Maturity Price : 25.00 Evaluated at bid price : 26.90 Bid-YTW : 3.73 % |
| BNS.PR.G | FixedReset | 32,300 | YTW SCENARIO Maturity Type : Call Maturity Date : 2021-07-25 Maturity Price : 25.00 Evaluated at bid price : 27.01 Bid-YTW : 3.78 % |
| BNS.PR.Z | FixedReset | 28,841 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.60 Bid-YTW : 5.88 % |
| There were 25 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| CU.PR.I | FixedReset | Quote: 26.45 – 26.89 Spot Rate : 0.4400 Average : 0.2788 YTW SCENARIO |
| W.PR.H | Perpetual-Discount | Quote: 25.04 – 25.40 Spot Rate : 0.3600 Average : 0.2312 YTW SCENARIO |
| CM.PR.Q | FixedReset | Quote: 21.11 – 21.49 Spot Rate : 0.3800 Average : 0.2896 YTW SCENARIO |
| BIP.PR.B | FixedReset | Quote: 25.81 – 26.14 Spot Rate : 0.3300 Average : 0.2540 YTW SCENARIO |
| VNR.PR.A | FixedReset | Quote: 18.50 – 18.95 Spot Rate : 0.4500 Average : 0.3750 YTW SCENARIO |
| TRP.PR.D | FixedReset | Quote: 18.11 – 18.38 Spot Rate : 0.2700 Average : 0.1951 YTW SCENARIO |
Hello James,
I am/was not a believer in negative interest rates. The only way I can rationalize these are as a temporary “cache for cash” in uncertain times where one manager of big Money (not his own…), not knowing what to do with it and very much afraid of a devaluation of some of the currencies of the holdings under its management, is making the bet that he stands a better chance of keeping his job longer (until his own retirement) by buying a large liquid instrument denominated in a “strong currency” eventhough the cost of buying same yields at maturity a negative return (but at least it is in that “safer” strong currency).
This will NEVER be for me I was thinking! If cash is truly a value, holding it can only be an advantage to its holder who, the least he could do, is to somehow reward the actual owner of same or at worst, giving him 0% interest for the benefit that comes with holding cash.
Well I am shaken…
Last month, BMO, where I have been holding two business accounts for my small businesses for many years, sent me apparently inoffensive circulars advising that they had determined that it was “to my advantage” to shift out from the business account programs I used to have with them for so many years since their opening (but that BMO would no longer maintain) to new ones where there would be a $22 per mont charge eventhough I always maintain balances in excess of $10k in each of these no interest bearing accounts.
From now on, without telling me that upfront but by having me scrutinizing the table coming with the letter, BMO will in effect charge a monthly fee of $22 per month per bank account eventhough these accounts did have less than 5 ATM cheque deposits, withdrawals or transfers per month and no paper account statements and eventhough the balance in each of these two accounts is always kept above 10k while generating 0% interest.
This total of $44 per month to “store” cash not yielding any interest is more than what I currently have pay to store closed files.
So I met my branch manager after waiting awhile at the counter as they no longer have a receptionist nor a suitable telephone system where I can have an appointment without first having to queue at their counters.
The best I could get from him eventhough the extent of my business or personal stuff with BMO or its affiliates is, I believe, significant was that they would extend by three months the program I had when I opened the account and might match better offers I might get by other financial insitutions if I could find one. With detailed coloured and nicely tables he already had ready, he was confident that no other big bank would do any better than BMO. He also told me that similar measures for personal accounts were also being considered.
I am meeting later this week with Desjardins… They have a bad reputation here for small businesses but I am apparently too small for big banks or the effective “negative interest” area is here for much longer than I thought…
Bye!
Louisprefs
I might consider reaching out to EQ Bank or Versa Bank and see what they might offer. EQ daily interest savings rates are around 2.25%, paid monthly.
Full disclosure – I opened an EQ account recently and moved some funds from my BMO “Super Saver” which paid, wait for it, 0.45%. Great convenience!
Fuller disclosure – I also hold VB.PR.A and B (both rate re-sets). The 7+% yield seems to offset the risk as a regulated schedule 1 bank. Caution both are thinly traded and may no be as liquid as other choices.
Louisprefs,
TD has a small business account with a monthly fee of $5 for up to 5 debit transactions per month. I believe RBC has something similar.
Adrian
RBC has a business eAccount with no monthly fee. I just switched from TD to RBC. No issues so far.