Operating-Retractible Yield Curve, 2006-07-26

Well, what are we to make of this yield curve?

OpRet YTW Curve 2006-07-26

This yield curve was plotted from the data prepared for the ‘Operating Retractible’ Index on 2006-07-26. The x-axis is modified duration, the y-axis is the pre-tax yield to maturity. Both data elements are obtained from the “YTW Scenario” – i.e., assuming a maturity-date and associate redemption price that reflects the worst-case-scenario (given current conditions) for the shareholder.

Retractible prefs are the class of prefs that behave most like bonds (an assertion I’ll prove at some point in the future, probably in a published article … for now, just trust me!) so one would expect that a yield curve would be a relatively smooth looking thing.

No such luck! BAM.PR.J, with a yield of 4.54% until its presumed redemption in March 2018, well above the curve, while PWF.PR.D seems well below its peers, having a YTW of only 1.87% based on a call at $26.00 in November 2007.

Could it be that the market is pricing the latter issue based on a redemption at $25.00 immediately prior to the retraction date in October 2012? Its yield based on the 2012 call is currently 3.72%, which is much closer to what comparable issues are paying. It is, perhaps, due to this sort of behaviour that HIMIPref finds the concept of portfolio yield useful in preferred share valuation.

The graph shown isn’t definitive, of course. No allowance has been made for credit rating and it is certainly possible to argue that the yield premium available on BAM.PR.J is mere compensation for the risk that its Pfd-2(low) rating from DBRS implies relative to the other labelled data points, which are all Pfd-1(low) – or simply that its extremely long time until its retraction privilege becomes exercisable make the other data points irrelevant for pricing purposes. It is also entirely valid to argue that the market is pricing in higher yields for the future, which will make the earlier redemption of PWF.PR.D less likely.

Arguments, arguments … that’s what makes a market!

2 Responses to “Operating-Retractible Yield Curve, 2006-07-26”

  1. […] Another yield curve for your edification and amusement! This one is similar in nature to Operating Retractibles yield curve discussed a few days ago, but does have some unique points of interest. There’s a lot of scatter – more scatter than there really should be, given that the average volume traded is so much greater than the equivalent number for the constituents of the OpRet index. And, one should note, I didn’t plot a point for RY.PR.S, which has a Modified Duration of the YTW scenario of 0.16 Years, and a YTW of -1.82%. The CM.PR.C and GWO.PR.F look rather expensive, don’t they? I certainly can’t figure out … the CM.PR.C looked good a little while ago, when they were trading in the neighborhood of $26.50 – I can’t say I’m so impressed with them nowadays, closing 7/31 with a quote of 26.76-87. But the most strange thing by far about this curve is that, while the lower quality credits look to be at a more or less decent spread to their higher-rated peers at the long end (well … relatively long end, anyway!), they seem to be trading through them at the short end, and not by just a little bit.  Which would seem to indicate some opportunity for arbitrage … What this graph does not, and cannot, convey is the degree of risk implicit in the fact that these are perpetuals … once market prices start to change, the position of each data point on this graph might change substantially – which is why HIMIPref has such concepts as ‘Portfolio Yield’ and ‘Option Doubt’. But as a first approximation, some of the anomalies shown by this plot look pretty juicy, don’t they? […]

  2. […] BAM.PR.J The fund has a large holding in BAM.PR.J, which returned -0.51% on the month and is -2.52% YTD (total return). I just don’t understand it – for some insight into just why I don’t understand it, see Operating-Retractible Yield Curve, 2006-07-26. Surely at some point the issue will come more in line with its peers … but I’ve been saying that for a while now … […]

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