BEP.PR.R closed today with no announcement from the company.
BEP.PR.R is a Straight Perpetual, 5.50%, announced April 5.
The issue traded 311,625 shares today in a range of 23.51-24.80 before closing at 23.60-80. As the HIMI PerpetualDiscount index has fallen about 5% since the April 5 announcement date, we may conclude that the issue fell more-or-less in-line with the market.
Vital statistics are:
| BEP.PR.R | Perpetual-Discount | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-14 Maturity Price : 23.30 Evaluated at bid price : 23.60 Bid-YTW : 5.85 % |
Hi everyone! James, you were wondering what Pembina pref issues I was basing my 5% yield comment on . . . here’s a few:
PPL.PR.O div of $1.116 to yield 4.84% at last traded price of $23.03
PPL.PR.E div of $1.1433 to yield 5.12% at last traded price of $22.30
PPL.PR.Q div of $1.2053 to yield 5.28% at last traded price of $22.79
I realize there are several issues, all over the place based on wide spreads, and low volume, but the comparison between pref and bond yields was a general one, to indicate the “sometimes” lack of priority of the dividend gross up, compared to fully taxable bond interest. It’s the registered accounts, TFSAs, etc where bond interest is on par with dividend income, as you’re aware.
Hi,
Anyone know why my FFH.PR.D took a big hit today?
Thx
Ferris
3% moves are no big deal these days. Everything gyrates by the annual dividend in a couple of days.
There were 12 trades, 9 of which were a single seller of less than 1000 shares. Last trade was $21.79, but it’s currently bid at $22.00. Only 3100 shares total traded today so far. This is probably not worthy of the word “hit”, but give it a few days. If it drops by the annual dividend amount, as skeptical points out as a possibility with any pref, and on some visible volume, . . . then you’ve seen a “hit”.
Ppl.pr.e will reset in a couple of years to GOC-5 +300. So 25x 5.67 percent is 1.4175/22.30 = 6.35 percent yield on current price in 2024 assuming no change in goc5.
Thx Guys for the response. Yeah, I overstated the “hit”. Seems preferred shares in general have not moved as much as I expected with rates moving up.
Thx again!
Just a general observation. Global correlations are not really moving as per expectations across many asset classes.
For preferreds, they trade like stock proxies and not bond proxies. When rates fall and cause a stock sell off, everything including perpetuals fall. Perpetuals should be rising in falling rate environment. But the fixed resets/floaters drag perpetuals down.
In rising rates, it seems the opposite is also happening. Fixed/floaters should rise, but they are being drawn down by perpetuals.
The expectation is that ‘bond’ like resiliency of preferreds should be recognized by the markets in both rising/falling rate markets, but so far it has not materialized, with the exception of the 2017/18 period. One can always argue that 2017/18 was driven by the generally positive sentiment for equities that got percolated to the preferred shares as well.
Again, the bottomline is that the correlation may not work as expected.
I imagine a reset of a large issue will shift this market. Too many think on current yield rather than future yield. With today’s rate and price trp.pr.a could reset at 6.5 percent – 400 points above GOC 5. What if GOC went to 3 or 3.5 could be 7.5 yo 8 percent dividend.. over 10 interest equivalent. Can’t see sluggish market continuing if that happens!
Two earliest issues resetting soon are
Enb.pr.b
And cu.pr.c
Both reset at goc5 plus 2.4
Assuming goc5 rises to 2.75% by end of the month,
We will see about 6.75% for Enb based on current price of 19.
Cu will see yield of 5.75% based on 22.5 price.
Perhaps these will tempt more.
We are heading into 4% GICs as well.
Lots of choices for fixed income, finally.
St Louis Fed President Jim Bullard mentioned the possibility (not neccessarily the probability) of a 75bp hike at some point and accelerated balance sheet unwind (plan B).
Bottom line is that I think central bankers are very concerned with inflation…BOC included in this. I expect them to err on the side of being aggressive in the next few months….I still think that bond yields are too low given central bank interest rate hikes that are in store.
skeptical, we could have the 2.75% by the end of today. But Enb.pr.b is actually getting “hit” today, as Ferris described the Fairfax issue yesterday lol. I’m wondering if investors see the May 22 reset as being too early in the cycle to have a competitive reset. “peaking too early”, as it might be called. We’ll probably be at 4% on the goc5 by this time next year. This might be envisioned as some kind of peak in the cycle , so the 2023 resets could be the issues that are viewed to be in the “sweet spot” of the buy cycle. Of course, I could be giving fund managers and retail pref investors way too much credit for logical thought with a notion like that!
We’ll probably be at 4% on the goc5 by this time next year.
It’s hard to say what rates will be a year from now. Very hard to predict that. Rates can fall just as easily as they have risen. All it will take is a couple of lower inflation readings and the tide will change.
I would like to believe that there isn’t such detailed analysis being done here by the market participants. It could be a simple re balancing exercise by portfolio managers dumping their lower yielding issues.
But it’s possible that your theory is right. There’s no way of knowing the weirdness going on here.
If higher rates are assumed to be sticky for a while, say a few years, the whole rate reset should rise. That hasn’t happened so far. Not even floaters.
The most simplistic explanation could be as follows:
Everyone holding perpetuals is dumping them. Then they are optimizing the rate resets based on spreads/yield/reset date as per their respective criteria. Consequently, we have all kinds of price action that defies normal expectations. But this is what we have come to expect from the preferred market. Weird price action resulting in some wonderful opportunities depending on what your macro viewpoint is.
skeptical, you’ve got a pretty realistic approach to the prefvironment! rotflmao on that word that just came to mind after reading your post! But I like the near termprospects for Enb.pr.b as a long term “coupon clipper hold”. . . If we can get the goc5 to 3 before they set the reset, then the div will be just over 7%, and now the word “irrestipref” comes to mind!
Those holding rate resets in their portfolio can now better appreciate Michael Burry’s position when he was waiting for the CDS payments to start coming in the face of collapsing housing bubble of 2007/8.
Our story:
Bond yields rising and currently at a decade high.
Common Stocks soaring, despite the obvious headwinds.
Preferreds down…why?
Because preferreds have to always align with the losing side, always. At this time it happens to be TLT and other long term bonds.
Careful skeptical! Prefs tend to be cyclical, and it’s not always easy to figure out what kind of cyclical behaviour they will exhibit. No question about that. But I don’t think many here would agree that prefs “always” align with the losing side. If we really believed that, would we invest in them? Would we be here? I think everyone here agrees prefs have a number of very appealing investible features . . . just figuring out how to collect tax favourable decent dividends, without taking too many account valuation hits along the way . . . that’s the ongoing challenge!
Prefs tend to be cyclical, and it’s not always easy to figure out what kind of cyclical behaviour they will exhibit.
There. That’s all you need to know about the disconnect between the ‘fundamentals’ and the price.
Other than that, of course, preferreds are great, that’s why we are all here.
I’d rather sum it up like this: Preferreds are good; tax discounted dividends are better; capital gains at a 50% inclusion rate are best . . . getting all three without massive account valuation declines? . . . That’s “great”!
you were wondering what Pembina pref issues I was basing my 5% yield comment on . . . here’s a few:
PPL.PR.O div of $1.116 to yield 4.84% at last traded price of $23.03
PPL.PR.E div of $1.1433 to yield 5.12% at last traded price of $22.30
PPL.PR.Q div of $1.2053 to yield 5.28% at last traded price of $22.79
This refers to ratchetrick‘s claim that PPL preferreds were yielding about 5% about a week ago, which I consider a gross understatement.
These are Current Yields, which the market used for valuation in the early days of FixedResets, but abandoned when TRP.PR.A reset from 4.60% to 3.266%, alerting even the least attentive stockbroker to the notion that perhaps this wasn’t a good idea.
There are several theoretical problems with the approach.
You are assuming that issues will reset at levels equal to their prior level.
For example, PPL.PR.O (formerly VSN.PR.A) resets 2022-9-30 at GOC5+292, hence you are assuming that the five year rate will be 1.544% 30 days prior to 2022-9-30 and every five years thereafter; while
PPL.PR.E resets 2024-6-1 at GOC5+300, hence you are assuming that the five year rate will be 1.573% 30 days prior to 2024-6-1 and every five years thereafter; while
PPL.PR.Q resets 2024-3-31 at GOC5+301, hence you are assuming that the five year rate will be 1.811% thirty days prior to 2024-3-31 and every five years thereafter.
The nature of FixedResets forces one to make an assumption regarding future rates and, qualitatively, one forecast is as justifiable as any other; but such precision in predicting a constantly repeating cycle of changing yields will strike most people as being a little odd.
You will also note that you are forecasting a five-year Canada yield of 1.544% at the beginning of next September, a drop of nearly 125bp from current levels. I do not believe such a forecast will meet with a lot of support as a foundation for an investment portfolio.
You are left with the task of explaining the variation in these Current Yields
In this particular example of three issues, the variation is not particularly extreme; but as investors at the time of the TRP.PR.A reset mentioned above found out, this is not always the case.
However, most tellingly:
You will be forecasting more than one GOC5 rate on a single day
New issues rarely, if ever, reset exactly five years after announcement date; it’s (almost?) always longer, sometimes as long as six and a half years, which seems to be the most the underwriting community will tolerate.
For instance, IAG.PR.I (now IAF.PR.I) was announced in late February, 2018, a FixedReset 4.80%+275, and will reset effective 2023-3-31. Your methodology demands that the dividend remain constant and that therefore the Calculation Day GOC-5 yield will be 2.05%.
However, BIP.PR.E, a FixedReset 5.00%+300M500, resets same day and maintaining the same yield requires a 2.00% GOC-5 yield.
This is a small, but definitely vital, internal contradiction to your argument (finding larger contradictions will be easy, but tedious; just look for new issues announced shortly prior to a major GOC-5 yield change). How can you possibly justify it?
In addition, I note your comment: But I like the near termprospects for Enb.pr.b as a long term “coupon clipper hold”. . . If we can get the goc5 to 3 before they set the reset, then the div will be just over 7%, and now the word “irrestipref” comes to mind!
How do you reconcile this anticipation with your endorsement of Current Yield as a valuation measure?
“with today’s rate and price trp.pr.a could reset at 6.5 percent – 400 points above GOC 5”
Can someone explain how TRP.PR.A can be 400 points above GOC 5? I thought it was 5YR + 1.92%.
Thx
Ferris
Can someone explain how TRP.PR.A can be 400 points above GOC 5? I thought it was 5YR + 1.92%.
At the close on April 19, TRP.PR.A was quoted at 17.44-45, with a bid-side yield of 6.36% (the calculation assumes that the 5-year Canada Rate will be 2.65% forever). Since the dividend rate is based on the $25.00 par value but the dividend yield is based on the market price, TRP.PR.A is currently levered up to the GOC-5 rate at a ratio of 25.00:17.44, or (very roughly) 3:2; implying that every 2bp change in the GOC-5 rate will result in 3bp change in the market yield of TRP.PR.A.
For a yield calculator for FixedResets, click HERE.
“Can someone explain how TRP.PR.A can be 400 points above GOC 5? I thought it was 5YR + 1.92%.”
It is, so it would be reset to 4.67% (based on GOC5 at 2.75%) at $25. At today’s close, that would be 6.9%, if one were to view it that way.
TRP.PR.A….never mind the idiotic bid price of $10 at the close (I will let James comment on the joke that call themselves market makers, though I am sure he is tired of doing that).
reset is 192bp…plus 275 for the current 5 yr GOC. This gives us a new dividend rate of 4.67%. That is what TRP pays based on a $25 par price. But using the last traded price of $17.07, the new yield to a purchaser at $17.07 is 6.84% by my calcs.
I will re-mortgage my house to buy all the market has to offer at 1 cent above the closing bid…..the reset would be almost 11.7%. Well, my m2m will look crappy tomorrow morning. Better not show the wife.
Thank you all for explaining. Bought a few hundred trp.pr.a yesterday. Will be adding a bit more in the next few days.
Appreciate your information,
Ferris