I mentioned the Agrium precedent in connection with the proposed Dealers’ Sleaze Fees supporting the TransAlta preferred share exchange offer – it looks like the issue will soon get another airing:
The largest shareholder in Liquor Stores NA Ltd. asked regulators Tuesday to halt a controversial vote-buying scheme rolled out by the retailer’s board of directors during a bitter proxy fight.
The incumbent board at Liquor Stores, North America’s largest publicly-traded chain of wine and spirits stores, launched a campaign last week that sees financial advisers paid five cents per share for each vote they obtain in favour of the current board, if the slate is elected at the company’s annual meeting, scheduled for June 20.
Private equity fund PointNorth Capital Inc., which owns 9.9 per cent of the 252-store Edmonton-based chain and nominated six directors on the nine-person board, filed an application early Tuesday with the Alberta Securities Commission asking that the adviser payments be halted and that any voting agreements obtained for cash be terminated.
…
Lawyers watching this showdown from the sidelines said the Alberta regulator is likely to weigh in on PointNorth’s application, as the issues break new ground on governance and the ASC may want to establish a precedent for future proxy battles.PointNorth said Tuesday that proxy advisory service Institutional Shareholder Services Inc. (ISS) sent a report on Liquor Store’s vote buying plan to ISS clients that said: “Investors may consider these solicitation fees as an improper defensive tactic that leads to an entrenchment of the incumbents.”
As one might expect, Liquor Stores’ response was disingenuous bullshit:
Liquor Stores N.A. Ltd. (the “Company” or “Liquor Stores”) (TSX: LIQ), North America’s largest publicly traded liquor retailer, today stated that an application by activist PointNorth Capital to the Alberta Securities Commission (ASC) is without merit.
Liquor Stores added that the Soliciting Dealer arrangement put in place by Liquor Stores is in the public interest, contrary to PointNorth’s claim to the ASC. The Soliciting Dealer arrangement is designed to alert the Company’s retail shareholders to the grave risk PointNorth poses to their Liquor Stores’ investment and ensure shareholder democracy in Canada can function for small shareholders and not just the large institutions.
Anybody with more than a grade four education will immediately ask why, given the stated aim, the Soliciting Dealer arrangement only pays stockbrokers for votes in favour of management’s favoured directors. But that never bothers the sleaze-bags who continue to infest large company management, PR firms and politics.
Meanwhile, market timers are in a tizzy about Poluz’s hawkish comments this morning:
The Canadian dollar strengthened to a two-month high against its U.S. counterpart on Tuesday as comments by Bank of Canada Governor Stephen Poloz supported the view that the central bank could raise interest rates sooner than previously thought.
The interest rates cuts the Bank of Canada made in 2015 have largely done their job as the economy appears to be gathering momentum, the head of the central bank said.
“Poloz today signaled that rates won’t be on hold forever,” said Nick Exarhos, economist at CIBC Capital Markets.
Chances of an interest rate hike this year have surged to 72 per cent from just 22 per cent before stronger-than-expected jobs data on Friday, data from the overnight index swaps market shows.
The audio of the interview has been posted by the BoC – no transcript, dammit!
The loonie did well:
The loonie surged after Wilkins’s comments, ending Monday up 1.1 percent to C$1.3350 per U.S. dollar in Toronto, the steepest increase since March and the biggest advance among Group-of-10 peers. The loonie added to gains Tuesday, rising 0.33 percent. Odds of a 2017 rate increase almost doubled to 59 percent, from 30 percent on Friday, based on trading in the swaps market. Yields on benchmark 2-year government bonds surged 11 basis points to 0.84 percent, and added another three basis points Tuesday to the highest since January 2015.
And the final level for the Canada five-year was 1.15% … holy smokes! It’s not even a recent high, but it’s up 10bp since yesterday and a total of 19bp since Friday! That’s a fast move … and very likely is the cause of today’s stupendous returns (and volume!) for FixedResets. And all this happened on a day on which 51 of the 377 issues I track went ex-dividend! There will be some sad stories coming out of that coincidence, I’m sure.
| 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 | 0.5770 % | 2,158.0 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.5770 % | 3,959.9 |
| Floater | 3.67 % | 3.67 % | 80,959 | 18.16 | 3 | 0.5770 % | 2,282.1 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.3465 % | 3,056.3 |
| SplitShare | 4.71 % | 4.28 % | 70,168 | 1.52 | 5 | 0.3465 % | 3,649.9 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.3465 % | 2,847.8 |
| Perpetual-Premium | 5.27 % | 3.20 % | 73,257 | 0.09 | 25 | 0.0499 % | 2,799.5 |
| Perpetual-Discount | 5.08 % | 5.07 % | 96,941 | 15.29 | 12 | 0.0574 % | 3,016.7 |
| FixedReset | 4.42 % | 3.96 % | 199,927 | 6.57 | 96 | 1.5642 % | 2,349.2 |
| Deemed-Retractible | 4.97 % | 4.92 % | 119,173 | 6.25 | 30 | 0.0953 % | 2,910.1 |
| FloatingReset | 2.48 % | 2.94 % | 52,204 | 4.38 | 10 | 1.2045 % | 2,561.5 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| GWO.PR.N | FixedReset | 1.01 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 16.06 Bid-YTW : 8.73 % |
| EIT.PR.A | SplitShare | 1.02 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2024-03-14 Maturity Price : 25.00 Evaluated at bid price : 25.76 Bid-YTW : 4.30 % |
| HSE.PR.G | FixedReset | 1.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 23.07 Evaluated at bid price : 24.22 Bid-YTW : 4.58 % |
| PWF.PR.T | FixedReset | 1.06 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 22.51 Evaluated at bid price : 22.89 Bid-YTW : 3.74 % |
| BNS.PR.D | FloatingReset | 1.16 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.76 Bid-YTW : 4.73 % |
| BAM.PR.B | Floater | 1.25 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 12.95 Evaluated at bid price : 12.95 Bid-YTW : 3.64 % |
| HSE.PR.E | FixedReset | 1.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 23.10 Evaluated at bid price : 24.20 Bid-YTW : 4.62 % |
| CU.PR.I | FixedReset | 1.41 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2020-12-01 Maturity Price : 25.00 Evaluated at bid price : 26.64 Bid-YTW : 2.57 % |
| NA.PR.S | FixedReset | 1.41 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 21.30 Evaluated at bid price : 21.59 Bid-YTW : 3.99 % |
| TRP.PR.A | FixedReset | 1.41 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 18.70 Evaluated at bid price : 18.70 Bid-YTW : 3.93 % |
| W.PR.K | FixedReset | 1.42 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2021-01-15 Maturity Price : 25.00 Evaluated at bid price : 26.47 Bid-YTW : 3.76 % |
| MFC.PR.H | FixedReset | 1.53 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2022-03-19 Maturity Price : 25.00 Evaluated at bid price : 25.14 Bid-YTW : 3.99 % |
| CU.PR.C | FixedReset | 1.55 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 21.57 Evaluated at bid price : 21.57 Bid-YTW : 3.92 % |
| HSE.PR.C | FixedReset | 1.80 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 22.65 Evaluated at bid price : 23.25 Bid-YTW : 4.43 % |
| NA.PR.W | FixedReset | 1.84 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 21.00 Evaluated at bid price : 21.00 Bid-YTW : 3.97 % |
| MFC.PR.F | FixedReset | 2.02 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 16.13 Bid-YTW : 8.74 % |
| BMO.PR.Q | FixedReset | 2.09 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.51 Bid-YTW : 5.31 % |
| MFC.PR.G | FixedReset | 2.10 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.79 Bid-YTW : 4.65 % |
| SLF.PR.H | FixedReset | 2.16 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.42 Bid-YTW : 6.75 % |
| VNR.PR.A | FixedReset | 2.16 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 21.30 Evaluated at bid price : 21.30 Bid-YTW : 4.51 % |
| SLF.PR.I | FixedReset | 2.17 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.07 Bid-YTW : 4.99 % |
| TRP.PR.C | FixedReset | 2.18 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 15.93 Evaluated at bid price : 15.93 Bid-YTW : 3.90 % |
| SLF.PR.G | FixedReset | 2.19 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 16.35 Bid-YTW : 8.61 % |
| BMO.PR.S | FixedReset | 2.37 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 21.61 Evaluated at bid price : 22.02 Bid-YTW : 3.81 % |
| TD.PF.D | FixedReset | 2.37 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 22.59 Evaluated at bid price : 23.29 Bid-YTW : 3.99 % |
| BAM.PF.G | FixedReset | 2.44 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 22.61 Evaluated at bid price : 23.31 Bid-YTW : 4.15 % |
| CM.PR.P | FixedReset | 2.47 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 21.15 Evaluated at bid price : 21.15 Bid-YTW : 3.93 % |
| RY.PR.Z | FixedReset | 2.47 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 21.27 Evaluated at bid price : 21.55 Bid-YTW : 3.77 % |
| TD.PF.E | FixedReset | 2.50 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 22.82 Evaluated at bid price : 23.79 Bid-YTW : 3.98 % |
| RY.PR.H | FixedReset | 2.51 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 21.35 Evaluated at bid price : 21.66 Bid-YTW : 3.80 % |
| MFC.PR.I | FixedReset | 2.58 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.08 Bid-YTW : 5.07 % |
| TD.PF.A | FixedReset | 2.65 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 21.38 Evaluated at bid price : 21.70 Bid-YTW : 3.81 % |
| BMO.PR.T | FixedReset | 2.66 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 21.26 Evaluated at bid price : 21.26 Bid-YTW : 3.88 % |
| BAM.PF.F | FixedReset | 2.67 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 22.66 Evaluated at bid price : 23.20 Bid-YTW : 4.17 % |
| TRP.PR.F | FloatingReset | 2.71 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 18.94 Evaluated at bid price : 18.94 Bid-YTW : 3.23 % |
| BAM.PF.B | FixedReset | 2.71 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 21.46 Evaluated at bid price : 21.80 Bid-YTW : 4.17 % |
| MFC.PR.K | FixedReset | 2.73 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.71 Bid-YTW : 6.15 % |
| RY.PR.J | FixedReset | 2.74 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 22.58 Evaluated at bid price : 23.22 Bid-YTW : 3.95 % |
| TD.PF.B | FixedReset | 2.77 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 21.27 Evaluated at bid price : 21.55 Bid-YTW : 3.85 % |
| CM.PR.O | FixedReset | 2.79 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 21.38 Evaluated at bid price : 21.70 Bid-YTW : 3.89 % |
| CM.PR.Q | FixedReset | 2.82 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 22.63 Evaluated at bid price : 23.36 Bid-YTW : 3.98 % |
| IAG.PR.G | FixedReset | 2.83 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.52 Bid-YTW : 5.41 % |
| BMO.PR.W | FixedReset | 2.84 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 21.34 Evaluated at bid price : 21.34 Bid-YTW : 3.84 % |
| MFC.PR.M | FixedReset | 2.85 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.28 Bid-YTW : 6.00 % |
| BMO.PR.Y | FixedReset | 2.87 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 22.60 Evaluated at bid price : 23.31 Bid-YTW : 3.94 % |
| BAM.PF.A | FixedReset | 2.90 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 22.36 Evaluated at bid price : 22.79 Bid-YTW : 4.26 % |
| TRP.PR.B | FixedReset | 2.92 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 14.80 Evaluated at bid price : 14.80 Bid-YTW : 3.77 % |
| BAM.PR.R | FixedReset | 2.98 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 19.12 Evaluated at bid price : 19.12 Bid-YTW : 4.21 % |
| TD.PF.C | FixedReset | 2.98 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 21.42 Evaluated at bid price : 21.42 Bid-YTW : 3.89 % |
| MFC.PR.J | FixedReset | 2.99 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.71 Bid-YTW : 5.08 % |
| MFC.PR.L | FixedReset | 3.05 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.62 Bid-YTW : 6.28 % |
| MFC.PR.N | FixedReset | 3.10 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.28 Bid-YTW : 5.94 % |
| BAM.PF.E | FixedReset | 3.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 21.36 Evaluated at bid price : 21.68 Bid-YTW : 4.19 % |
| BAM.PR.Z | FixedReset | 3.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 21.94 Evaluated at bid price : 22.48 Bid-YTW : 4.36 % |
| BAM.PR.T | FixedReset | 3.27 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 19.56 Evaluated at bid price : 19.56 Bid-YTW : 4.26 % |
| RY.PR.M | FixedReset | 3.28 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 22.20 Evaluated at bid price : 22.69 Bid-YTW : 3.94 % |
| HSE.PR.A | FixedReset | 3.30 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 15.97 Evaluated at bid price : 15.97 Bid-YTW : 4.13 % |
| PWF.PR.P | FixedReset | 3.42 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 16.33 Evaluated at bid price : 16.33 Bid-YTW : 3.89 % |
| IFC.PR.C | FixedReset | 3.75 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.60 Bid-YTW : 5.67 % |
| TRP.PR.D | FixedReset | 3.81 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 21.50 Evaluated at bid price : 21.50 Bid-YTW : 4.01 % |
| TRP.PR.H | FloatingReset | 4.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 14.08 Evaluated at bid price : 14.08 Bid-YTW : 3.21 % |
| IFC.PR.A | FixedReset | 4.18 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.01 Bid-YTW : 7.74 % |
| TRP.PR.E | FixedReset | 4.32 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 21.58 Evaluated at bid price : 21.98 Bid-YTW : 3.91 % |
| BAM.PR.X | FixedReset | 4.42 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 16.43 Evaluated at bid price : 16.43 Bid-YTW : 4.22 % |
| TRP.PR.G | FixedReset | 4.72 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 22.89 Evaluated at bid price : 23.95 Bid-YTW : 4.02 % |
| SLF.PR.J | FloatingReset | 4.76 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 15.62 Bid-YTW : 8.77 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| NA.PR.C | FixedReset | 1,359,922 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 23.10 Evaluated at bid price : 24.90 Bid-YTW : 4.33 % |
| CM.PR.R | FixedReset | 290,240 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 23.17 Evaluated at bid price : 25.04 Bid-YTW : 4.26 % |
| CM.PR.O | FixedReset | 203,378 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 21.38 Evaluated at bid price : 21.70 Bid-YTW : 3.89 % |
| TD.PF.A | FixedReset | 135,493 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 21.38 Evaluated at bid price : 21.70 Bid-YTW : 3.81 % |
| BAM.PR.X | FixedReset | 128,517 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 16.43 Evaluated at bid price : 16.43 Bid-YTW : 4.22 % |
| TD.PF.C | FixedReset | 99,539 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-06-13 Maturity Price : 21.42 Evaluated at bid price : 21.42 Bid-YTW : 3.89 % |
| There were 73 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| TRP.PR.A | FixedReset | Quote: 18.70 – 19.02 Spot Rate : 0.3200 Average : 0.2045 YTW SCENARIO |
| TRP.PR.J | FixedReset | Quote: 26.77 – 27.04 Spot Rate : 0.2700 Average : 0.1602 YTW SCENARIO |
| TRP.PR.D | FixedReset | Quote: 21.50 – 21.75 Spot Rate : 0.2500 Average : 0.1511 YTW SCENARIO |
| CCS.PR.C | Deemed-Retractible | Quote: 24.00 – 24.39 Spot Rate : 0.3900 Average : 0.3039 YTW SCENARIO |
| CM.PR.Q | FixedReset | Quote: 23.36 – 23.60 Spot Rate : 0.2400 Average : 0.1817 YTW SCENARIO |
| EIT.PR.A | SplitShare | Quote: 25.76 – 25.99 Spot Rate : 0.2300 Average : 0.1719 YTW SCENARIO |
James:
I find it interesting that increasing 5-year GOC yields push Fixed Reset Prices UP (and near term yields until the next reset, DOWN as a result). If 5-year GOC (or strongly related GIC) yields compete with fixed reset pref shares for investor capital, shouldn’t the prefs, like the bonds decrease slightly in price?
It seems to me that in a normal market, rising yields (at constant spreads) should depress the prices of existing issues. Does the opposite observation imply that spreads are falling faster than yields are rising?
Anyway, the current state of the market seemingly makes life good for fixed income portfolio diversifiers — weakness in bond prices is offset by gains in fixed resets.
Thanks for your insights.
Prefhound, when you say “I find it interesting that increasing 5-year GOC yields push Fixed Reset Prices UP (and near term yields until the next reset, DOWN as a result)”, doesn’t it depend on whether the fixed reset is a low or high spread variety?
If I own a low spread reset, such that there’s a near 100% expectation that it will be reset on the next date, then I would expect its share price to rise with a rise in the 5-year GOC, since it’s more valuable with the expectation of a higher dividend.
Alternatively, if I own a high spread reset, and I’m convinced it will not reset, then it would be more bond-like in its reactions to 5-year GOC.
ltr
shouldn’t the prefs, like the bonds decrease slightly in price?
No. Actually, most extant issues should increase a bit, with the increase greatest for the lowest priced FixedResets.
The reason for this is that the bulk of the price should be dependent upon the cash flows more than five years hence: obviously, something paying a 5% dividend (on market price) will only pay out 25% (before discounting; slightly less after discounting) of its value in the next five years. Therefore, 75%+ of the market value is determined by the cash flow stream 5+ years hence.
Granted, this generally should be discounted at higher yield (given that the initial condition is an increase in GOC-5) but the other point is that discounted issues have leverage against the five-year: their payout is based on par, so if the issue is fortuitously priced at 12.50, then a 1bp increase in the five-year will lead to a 2bp increase in issue yield after reset.
I discuss this in the section “Effect of GOC-5 on Pure Price”, on page 5 of my 2016 essay on Implied Volatility for FixedResets.
In the current market we are seeing a slight reversal of an anomaly that developed during the 2014-16 bear market, in which the yield to perpetuity of discount FixedResets remained relatively constant in the face of declining GOC-5 yields; much of the pain was borne by the market price, which doesn’t make much sense, but since when does the preferred share market make sense? It would seem that investors were demanding a specific minimum yield for a FixedReset investment; this minimum yield may have been determined by reference to the dividend yield on income-oriented common stocks or something more random. I don’t know; show me data for ten such bear markets and I’ll be able to make a better guess!
This has the rather strange effect that the Effective Modified Duration (using GOC-5 as the basis) of FixedResets is very often negative! I discuss this point in the section “An Experimental Data Series” of the publicly available “FixedReset Review: October, 2016“, which starts on page 38 of the PDF.
I would expect this effect to persist until the effects of the bear market have finished unwinding … which doesn’t mean a 100% reversal! It could be more, could be less, but eventually we should reach an equilibrium in which the market trades at a more or less constant spread against the GOC-5, whatever that might be (it should be partially dependent upon the term spread against long-term Canadas, in addition to corporates spreads and liquidity premia). Of course, once we have reached equilibrium, it’s only a matter of time before a shock of some kind disrupts the equilibrium!
doesn’t it depend on whether the fixed reset is a low or high spread variety?
Yes, like_to_retire, you are quite right.