TD.PF.M & CM.PR.Y: Still Expensive

Assiduous Reader coolmesh asked on the August 20 post:

I’ve been watching TD.PF.M getting hammered the last four weeks. Good rate, good reset rate and good quality company. Any thoughts on what’s going there?

TD.PF.M is a FixedReset 5.10%+356, NVCC, that commenced trading 2019-6-4 after being announced 2019-5-24. It is tracked by HIMIPref™ and is assigned to the FixedReset (Discount) subindex.

CM.PR.Y is a FixedReset, 5.15%+362, NVCC, that commenced trading 2019-6-4 after announced May 24. It is tracked by HIMIPref™ and is assigned to the FixedReset (Discount) subindex.

June 4 was the last date we saw a new issue start to trade, as the new issue market is currently ‘closed for re-pricing’, we might say. We might normally expect a bank issue or two to be announced once the banks have gotten their 19Q3 earnings announcements out of the way, but given the tone of the market it won’t be surprising if they just give this opportunity a miss. On the other hand, the grossly foreshortened 5-year call-lockout period for FixedResets means that issuers have relatively little at risk in offering so-called perpetual product in times of elevated yields (this has always been a crucial point with this structure) so who knows?

It will be recalled that with respect to the issue-date pricing of TD.PF.M, I concluded:

According to this [Implied Volatility] analysis, the fair price of the new issue is 23.58, down 0.69 from the announcement day fair value of 24.27.

… while the conclusion for CM.PR.Y was:

According to this analysis, the fair price of the new issue is 23.71, down from the announcement day fair-value of 24.85, but alert Assiduous Readers will have noticed that the Implied Volatility plot is very peculiar, having three expensive issues and four cheap ones, with nothing in between.

So let’s update the Implied Volatility Analyses:

Click for Big
Click for Big

According to these analyses, TD.PF.M continues to be very expensive, bid at 23.86 with a fair price of 22.54; the same applies to CM.PR.Y, bid at 23.50 with a fair value of 22.44.

And now we can turn to relative performance for the month-to-date:

Click for Big

So neither TD.PF.M (Spread +356bp, Performance -4.71%) nor CM.PR.Y (+362bp, -5.81%) are too far out of line with either the series for their issuers or with the general “Pfd-2 Group” (which includes Pfd-2(high) and Pfd-2(low) issues). In fact, they’ve done relatively well due to their relatively high Issue Reset Spreads, although correlation is poor.

There are three obvious outliers that are ruining the correlation analysis: CIU.PR.C (+136bp, -1.55%); BAM.PF.J (+310bp, -0.76%); and VNR.PR.A (+281bp, +0.40%); the last of which is inching towards acquisition at par. If we perform the correlation analysis without these three, we find a correlation of 19% – which isn’t bad, given three weeks of chaos – and it is this correlation that is shown on the chart.

So the short answer to the question:

Any thoughts on what’s going there?

is … the market’s blown up and these issues are not immune. Note that both of these recent new issues remain expensive relative to their peers and I expect this premium pricing to decay over the next twelve months or so, which is equivalent to saying that I expect them both to underperform.

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