Inflation expectations are normalizing:
The U.S. bond market’s gauge of investor inflation expectations this week rose to six-month highs, bolstered in part by data showing higher producer and consumer prices in July.
The yield spread, or inflation breakeven rate, between five-year Treasury Inflation Protected Securities (TIPS) and regular five-year Treasuries hit 1.565% on Thursday, the highest since February.
U.S. 10-year and 30-year breakevens touched 1.6618% and 1.7105% on Wednesday and Thursday, respectively. Both levels were six-month peaks.
Breakeven rates pared some of that move Friday as they came off their highs.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
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| 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 | 0.0405 % | 1,602.3 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0405 % | 2,940.2 |
| Floater | 5.21 % | 5.28 % | 63,075 | 14.98 | 3 | 0.0405 % | 1,694.5 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0988 % | 3,500.1 |
| SplitShare | 4.67 % | 4.48 % | 42,124 | 3.25 | 8 | -0.0988 % | 4,179.9 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0988 % | 3,261.3 |
| Perpetual-Premium | 5.55 % | 4.70 % | 84,317 | 4.03 | 4 | 0.0992 % | 3,098.5 |
| Perpetual-Discount | 5.45 % | 5.64 % | 77,754 | 14.38 | 31 | -0.0508 % | 3,351.4 |
| FixedReset Disc | 5.66 % | 4.45 % | 122,886 | 15.96 | 67 | -0.1238 % | 2,026.4 |
| Deemed-Retractible | 5.23 % | 5.32 % | 90,184 | 14.58 | 27 | -0.0108 % | 3,285.0 |
| FloatingReset | 2.90 % | 2.01 % | 42,122 | 1.44 | 3 | -0.0450 % | 1,775.7 |
| FixedReset Prem | 5.27 % | 4.18 % | 229,891 | 0.92 | 11 | 0.1597 % | 2,612.5 |
| FixedReset Bank Non | 1.95 % | 2.46 % | 107,266 | 1.44 | 2 | -0.3618 % | 2,839.4 |
| FixedReset Ins Non | 5.85 % | 4.63 % | 95,872 | 15.79 | 22 | -0.3161 % | 2,052.4 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| RY.PR.M | FixedReset Disc | -35.76 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 11.98 Evaluated at bid price : 11.98 Bid-YTW : 6.38 % |
| MFC.PR.J | FixedReset Ins Non | -4.10 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 16.87 Evaluated at bid price : 16.87 Bid-YTW : 4.83 % |
| IFC.PR.C | FixedReset Ins Non | -4.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 15.50 Evaluated at bid price : 15.50 Bid-YTW : 5.06 % |
| IFC.PR.G | FixedReset Ins Non | -1.84 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 17.62 Evaluated at bid price : 17.62 Bid-YTW : 4.72 % |
| TD.PF.D | FixedReset Disc | -1.58 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 18.70 Evaluated at bid price : 18.70 Bid-YTW : 4.32 % |
| MFC.PR.G | FixedReset Ins Non | -1.40 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 17.90 Evaluated at bid price : 17.90 Bid-YTW : 4.69 % |
| MFC.PR.B | Deemed-Retractible | -1.39 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 21.33 Evaluated at bid price : 21.60 Bid-YTW : 5.37 % |
| TRP.PR.C | FixedReset Disc | -1.35 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 8.74 Evaluated at bid price : 8.74 Bid-YTW : 5.68 % |
| BAM.PF.F | FixedReset Disc | -1.27 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 15.60 Evaluated at bid price : 15.60 Bid-YTW : 5.64 % |
| IFC.PR.A | FixedReset Ins Non | -1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 11.86 Evaluated at bid price : 11.86 Bid-YTW : 4.98 % |
| TRP.PR.A | FixedReset Disc | -1.05 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 12.26 Evaluated at bid price : 12.26 Bid-YTW : 5.48 % |
| NA.PR.G | FixedReset Disc | 1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 19.75 Evaluated at bid price : 19.75 Bid-YTW : 4.45 % |
| RY.PR.H | FixedReset Disc | 1.10 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 17.50 Evaluated at bid price : 17.50 Bid-YTW : 4.13 % |
| TRP.PR.G | FixedReset Disc | 1.15 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 15.35 Evaluated at bid price : 15.35 Bid-YTW : 5.53 % |
| TRP.PR.B | FixedReset Disc | 1.20 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 8.45 Evaluated at bid price : 8.45 Bid-YTW : 5.10 % |
| MFC.PR.R | FixedReset Ins Non | 1.50 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 23.24 Evaluated at bid price : 23.65 Bid-YTW : 4.51 % |
| RY.PR.S | FixedReset Disc | 1.54 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 19.80 Evaluated at bid price : 19.80 Bid-YTW : 4.00 % |
| MFC.PR.H | FixedReset Ins Non | 2.43 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 19.50 Evaluated at bid price : 19.50 Bid-YTW : 4.63 % |
| TD.PF.L | FixedReset Disc | 19.30 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 22.67 Evaluated at bid price : 23.55 Bid-YTW : 4.19 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| NA.PR.C | FixedReset Disc | 104,840 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 22.20 Evaluated at bid price : 22.50 Bid-YTW : 4.36 % |
| CM.PR.S | FixedReset Disc | 73,105 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 18.60 Evaluated at bid price : 18.60 Bid-YTW : 4.19 % |
| CM.PR.R | FixedReset Disc | 51,900 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 21.49 Evaluated at bid price : 21.85 Bid-YTW : 4.44 % |
| RY.PR.S | FixedReset Disc | 34,941 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 19.80 Evaluated at bid price : 19.80 Bid-YTW : 4.00 % |
| BAM.PF.D | Perpetual-Discount | 26,700 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 22.10 Evaluated at bid price : 22.35 Bid-YTW : 5.55 % |
| TD.PF.A | FixedReset Disc | 25,050 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2050-08-14 Maturity Price : 17.20 Evaluated at bid price : 17.20 Bid-YTW : 4.21 % |
| There were 18 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| RY.PR.M | FixedReset Disc | Quote: 11.98 – 18.91 Spot Rate : 6.9300 Average : 3.7469 YTW SCENARIO |
| MFC.PR.J | FixedReset Ins Non | Quote: 16.87 – 18.05 Spot Rate : 1.1800 Average : 0.7627 YTW SCENARIO |
| TD.PF.E | FixedReset Disc | Quote: 18.72 – 20.37 Spot Rate : 1.6500 Average : 1.2969 YTW SCENARIO |
| CCS.PR.C | Deemed-Retractible | Quote: 22.80 – 23.50 Spot Rate : 0.7000 Average : 0.4656 YTW SCENARIO |
| MFC.PR.G | FixedReset Ins Non | Quote: 17.90 – 18.59 Spot Rate : 0.6900 Average : 0.5075 YTW SCENARIO |
| IFC.PR.C | FixedReset Ins Non | Quote: 15.50 – 16.25 Spot Rate : 0.7500 Average : 0.5912 YTW SCENARIO |
Hi, I was wondering what would happen to fix restet prefered shares if Canadian 5y GOC rate go negative? Would the reset rate stop at 0% or would it go negative? On a very low reset rate, i.e mfc.pr.3, could we end up “owning” the issuer if rates go low enought?
This gets discussed every now and then …
I can’t give you a clear answer. I suspect that in the event that GOC-5 does go negative there would be much discussion, arm-twisting and possibly litigation before the question was resolved.
However, I do believe that the most likely scenario is that in the event of a negative GOC-5, the dividend would continue to reset to the sum of the GOC-5 rate and the spread, with a floor of 0%: e.g., for an issue resetting at GOC-5 +150bp, the rate would reset at 1.00% if GOC-5 was -0.50%; and the reset rate would be 0.00% if GOC-5 was -2.00%.
This would follow the European precedent, discussed here.
Thanks for the quick answer James.