9 Responses to “December 11, 2018”

1. prefman says:

   December 12, 2018 at 4:48 am

   The tax losses are attractive!… but so are these prices to buy more! I know if you sell and buy back the same issue it is a superficial loss and claim denied… but what if you sell one issue and buy another of the same company. I assume since they are technically different securities that is OK?

2. Prefhound says:

   December 12, 2018 at 6:39 pm

   Hi James:
   Interesting times in the pref market these days. 3 months ago BIP.PR.F 5.1%/+292 Min 5.1% was issued and you called it grossly overpriced (by $1.70). Now it is $22, how is it doing?

   Can we infer anything about the value of the minimum yield feature from a comparison with BIP.PR.A ($19.60, issued at 4.5%/+396 with no minimum)?

   Yes, BIP.PR.F would reset at 5.1% if GOC-5 stayed at the 2.06% of today (2.92% + 2.06% = 4.98%, so minimum would be triggered). However, BIP.PR.A would reset at 3.96% + 2.06% = 6.02%. Sure, there is a 15c annual dividend benefit to PR.F for another 1.5 years, but a 23c annual difference in favour pf PR.A for the next 3.5 years after.

   For PR.A 6.02% yield on par (7.7% prospective yield on current price) looks a lot better than 5.1% (5.8% on current price) for PR.F. A person arguing for no additional value for the minimum feature could argue PR.A should trade about $1.70 higher than PR.F, not the current $2.40 less. Since it doesn’t, does that mean the minimum feature is “worth” $4.10??

3. Prefhound says:

   December 12, 2018 at 7:10 pm

   An even more egregious example is EMA.PR.C ($19.60) or F ($18.99) vs EMA.PR.H ($24.60, minimum 4.9%). PR.H has a slightly lower reset spread (2.54% for the H vs 2.65% for C or 2.63% for F). Here it looks like the market values the minimum feature at $4.50!
   OR, is it just that EMA.PR.H and BIP.PR.F are new issues in Sept and May of 2018 and traders are valuing them “higher” for some other reason? Mom and Pop haven’t been burned (yet) so haven’t rushed to sell? Pros aren’t in a mood to buy because they are suffering redemptions and also have to sell?
   Are GOC-5 futures way lower than 2.06% spot rate, so expecting the minimum to be even more important?
   Or just random fluctations?
   You taught us that 25c over and under valuations were worth pursuing. Is several dollars a record, or should we expect worse is possible? What is the largest over and undervaluation you have experienced?

4. skeptical says:

   December 12, 2018 at 7:31 pm

   IMHO, the market is totally screwed up right now. Market doens’t like Insurance discount perpetuals that are yielding close to 6%. These are all P(2) and P(2H) issues.
   Okay, so there’s fear of rising rates.
   The market doesn’t like anything with less than 400 bps spread over GOC that doesn’t have a minimum yield built into it.
   So there’s fear of deflation and falling rates.
   Market doesn’t like many issues that have generous spread as well as wide spread. So many issues are trading below par (TRP.PR.K)

   So what does this market want?

   Patience and a walk in the woods or may be cross country skiing!

5. BarleyandHops says:

   December 13, 2018 at 6:47 pm

   Market doens’t like Insurance discount perpetuals that are yielding close to 6%

   <WORD!

6. jiHymas says:

   December 13, 2018 at 10:37 pm

   I assume since they are technically different securities that is OK?

   I’m sorry, prefman, but this is way too risky a question for me to answer, particularly since I’m not a tax professional.

   I am cognizant at all times that if I give somebody actual investment advice on this blog and they lose so much as nickel for following it, that there is a high probability that they will:
   a) sue me into bankruptcy
   b) throw me naked out onto the street
   c) spit on me if I ask for a crust of bread.
   d) spend the rest of their lives bragging about how they exposed and punished one of those overpaid, useless financial professional scumbags and saved all kinds of money trading for $6.95.

   So I’ve become increasingly uncomfortable with the specific nature of a lot of the questions I’ve been receiving lately, both on the blog and via eMail. I try, more or less, to restrict my comments to something I would tell a reporter if he was interviewing me for an article for general consumption.

   If I’m going to risk my reputation and livelihood, I’d at least like to get paid.

7. jiHymas says:

   December 13, 2018 at 10:59 pm

   A person arguing for no additional value for the minimum feature could argue PR.A should trade about $1.70 higher than PR.F, not the current $2.40 less. Since it doesn’t, does that mean the minimum feature is “worth” $4.10??

   I’ve uploaded an Implied Volatility Analysis for the BIP series of FixedResets as of the close today. According to that analysis, the fair value of BIP.PR.A is 23.65, compared to its actual bid price of 19.86. So you can make an argument that the Minimum Rate Guarantee is trading for $3.79

   Note that I said “trading for”, not “worth”! I don’t think the guarantee is worth much, if anything, but the way that issues with the feature have held up in this downturn suggests that the market will continue to ascribe a lot of value to it for some time to come.

   I think it’s one of those “Wile E. Coyote” things we all talked about in the Credit Crunch, where something is worth a lot of money until one day it isn’t … but we’ll see!

   I’m very impressed, by the way, at just how good the fit of the theory is to the supplied data. The goodness-of-fit is even more astonishing when one considers that the trigger GOC-5 rate (below which the Minimum Rate kicks in) varies between 0.97% for BIP.PR.B to 2.18% for BIP.PR.F. I suppose one could come up with some fancy adjustments to the theory that disaggregate the option value into a “spread” component and a “GOC-5” component (it’s currently all “spread”), but that’s not something I’ve tried to do.

   But dammit, an in-the-money option (BIP.PR.F) should be worth a lot more than a way-out-of-the-money option (BIP.PR.B)!

8. jiHymas says:

   December 13, 2018 at 11:17 pm

   Here [the EMA series] looks like the market values the minimum feature at $4.50!

   My analysis above estimates that EMA.PR.H is $4.47 rich … pretty close!

   OR, is it just that EMA.PR.H and BIP.PR.F are new issues in Sept and May of 2018 and traders are valuing them “higher” for some other reason?

   Assiduous Readers will know that I usually conclude that new issues are expensive. Some may also have noticed that the BMO-CM “50” index has outperformed TXPR fairly consistently over time and I suspect that that can be traced to the details of index construction – new issues will be added to TXPR on the quarterly rebalancing date following issuance, but the BMO-CM “50” is much slower to add the issues; as a result, the average “age” of issues in the “50” is much longer than for TXPR.

   So in the course of all the Implied Volatility Analyses published here, many will have noted that:
   i) the fits are generally pretty good
   ii) except for new issues

   suggesting that new issues lose their premium over time.

   What I’m planning to do at some time in the future is check all this – selecting FixedResets for which sufficient comparators exist and checking their rich/cheap valuation for 12 or 24 months following issue. If I’m right, then there will more often than not be a progression from rich to fair, which will go a long way towards supporting my contention that new issues are (almost) always expensive.

9. Prefhound says:

   December 14, 2018 at 5:41 pm

   Thanks James. It will be interesting to see the new issue premium decay time or half life should you get around to looking at it. Seems to last at least until the next new issue and maybe longer.
   Interesting that you get BIP volatility of 38% vs EMA 5% when maybe 10-15% in normal markets would be reasonable.
   Cheers