14 Responses to “April 22, 2022”

1. niagara says:

   April 23, 2022 at 8:12 am

   FYI, Bank of Montreal is redeeming BMO.PR.C.
   https://newsroom.bmo.com/2022-04-22-Bank-of-Montreal-to-Redeem-Non-Cumulative-5-Year-Rate-Reset-Class-B-Preferred-Shares,-Series-40-Non-Viability-Contingent-Capital-NVCC

   Not a big surprise to me given that it would have reset at over 6%, which would have been sweet.

   I expect CIBC will do the same with CM.PR.R

2. skeptical says:

   April 23, 2022 at 10:14 am

   This is why the promised higher dividends may not materialize for these higher rate resets. This issue paid a pitiful 4.4%, had a nearly 50% drawdown during the pandemic and has traded close to par since about August 2020.
   BMO.PR.Z issued a couple of years before that yielded 5%, never fell more than 25% and generated a 4% capital gains before its redemption.
   Lessons- the house always wins and if by chance the goodies offered by the house go on discount, take them.

3. paradon says:

   April 23, 2022 at 12:21 pm

   I agree that we will likely see redemptions in the next 12-18 months if issuers feel that rates may start to come back down after a quick run up. If you can buy a decent issue at redemption value though it will likely be a pretty safe bet while you collect the dividend.

4. niagara says:

   April 23, 2022 at 3:28 pm

   skeptical, why do you say that the higher dividends may not materialize? The dividend that we care about as investors may be quite a different thing that what the issuer cares about. The issuer cares not about the market value, just what they have to pay in dividend rate based on the par price ($25).

   So, looking at BAM.PR.X, which is resetting in a month or so at 180bp. Current yield is 3.8% but if the GOC5 is 2.80% when they reset, the new dividend is $1.15. If you buy at $18, your yield is 6.4%, a rather nice improvement and a great yield for investment grade. Brookfield does not care about this yield, just what they would pay which is the $1.15 dividend, or 4.6% based on the $25 par price (since that is what they would have to pay investors o redeem the issue). There is zero chance that they will redeem this.

5. skeptical says:

   April 23, 2022 at 5:19 pm

   Niagara
   Not doubting that at all. Just saying that the closer a rate reset trades to par, the greater is the spread and greater the likelihood of redemption. The current discount in rate resets is the ‘opportunity’. And just like with perpetuals, the opportunities can keep on getting sweeter if there’s a broader fall in markets while interest rates rise.
   OTOH, if there’s a definite regime change of interest rates, we will see these opportunities disappear soon.

6. ratchetrick says:

   April 25, 2022 at 11:39 am

   all bang on skeptical . . . but today’s panic button item is good old Covid19. Apparently Beijing is approaching “lockdown” status. The broader markets see this as an immediate reduction in commodities demand, as well as further supply chain challenges. As we all supposedly understand . . . these items will be resolved with aggressive interest rate hikes! (just joking) . . . anyway, gold, oil, equities are all getting sold off based on this latest “sky is falling” scenario, so prefs, with widening spreads are getting “hit” a bit as well. The good news is that the 6% threshold (pipeline issues aside) continues to hold up, . . . stubbornly actually. We should be well into the capitulation trade and 6%+ dividend range by now, but we’re not. Cudos to pref holders who refuse to sell into this downdraft!

7. skeptical says:

   April 25, 2022 at 11:45 am

   The selling is done mostly by ETFs, IMHO, not the assiduous readers of this forum and other discerning investors. If I get overweight by a few bps for an issuer, I don’t sleep. But ETFs must sell. And that causes the downward pressure, along with numerous other allocation constraints and algorithmic considerations.
   OTOH, the typical 60/40 portfolio has taken about 10/15 hit by now. So pain is equally widespread right now.

   For the chart watchers, CPD is now embracing the pre-Covid highs. Pretty much the entirely of post covid gains are gone poof and numerous issues trading well below the pre covid highs.

8. skeptical says:

   April 25, 2022 at 11:50 am

   I meant I don’t lose sleep.

9. ratchetrick says:

   April 25, 2022 at 12:05 pm

   skeptical . . . yes! . . . absolutely right! The serious volume is definitely being done at the “professional” level. But this volume is being called primarily by the underlying retail money being withdrawn from those ETFs, and mutual funds. The fund managers have no choice due to the wide spreads, but to dump shares, thus widening the spreads and creating per share losses that, in many cases, seem to be unjustified.

10. skeptical says:

    April 25, 2022 at 12:16 pm

    Then of course, there’s the liquidity constraint. If an ETF has to raise funds for redemption, they must sell whatever is most liquid at that moment and then rebalance. So most liquid issues, typically higher quality names get sold first and then other, less liquid/lower credit names get the proverbial axe for liquidation at the time of rebalance.
    The algorithms probably differ and accordingly we see variegated selling patterns.

11. ratchetrick says:

    April 25, 2022 at 12:38 pm

    Skeptical; I believe your description of the reality of ETFs is probably bang on. It leads to the obvious question, though: Why would anyone of sound mind ever park their money in an ETF?

12. skeptical says:

    April 25, 2022 at 12:50 pm

    Anyone dare guess where the yields will ‘bottom’ for perpetuals. Is there a chance we touch pandemic lows for perpetuals? We are rapidly approaching those levels for many issues, especially for utilities.
    Would a 7% from FTS or CU be tempting enough to discard all rising rate/inflation considerations?

13. ratchetrick says:

    April 25, 2022 at 1:15 pm

    depends how long it takes to get to the 7% level, skeptical. If we get there within a week (unlikely, but anything’s possible), I’d say not tempting enough, and start to target 8% money. If we linger around here through the next US & Canadian meeting, where at least 50bp is expected . . . then we might then be experiencing selling exhaustion, and the 7% target would make more sense. Right now, the elevator is still going down; it needs to reach the ground floor, before we can start the long journey back up (but we’ll be using the stairs for that)

14. Stuart says:

    April 25, 2022 at 2:07 pm

    James, thank you so much for waking me up. I picked up some TRP.PR.C this morning to replace TRP.PR.K. I also recently re-started my PrefLetter subscription so look forward to learning more over the next 12 months.