TXPR closed at 624.82, up 0.80% on the day. Volume today was 1.51-million, well below the median of the past 21 trading days. Today’s fine performance, following yesterday‘s bounce, regains lost ground all the way back to, um, late Monday afternoon.
CPD closed at 12.40, up 0.08% on the day. Volume was 147,220, well above the median of the past 21 trading days.
ZPR closed at 10.35 down 0.10% on the day. Volume of 444,010 was second-highest of the past 21 trading days, behind only April 7.
Five-year Canada yields were up 9bp to 2.77% today.
The furor in the comments regarding politics on PrefBlog got me interested in learning more about the National Legal and Policy Center, which is making quite a fuss at many annual meetings this year. They have a fair sized Wikipedia entry that has not attracted much controversy (according to the rate of edits), but which concentrates on their activities with political ethics.
It looks like something has changed, though, since their website homepage is dominated by notices of their annual meeting challenges to corporations, which tells you something about where their donations are coming from (or ‘what they are being paid to say’. Take your pick).
I find this explicit political targetting of corporations to be really scary, given that Florida Republicans feel that there is some hay to be made in attacking them. I like to look at the Instagram political pages to get an idea of what the lunatic fringes are talking about and the loony right is absolutely thrilled with the assault on Disney.
So anyway, I posted about their remarks at the Wells Fargo meeting because I thought it was (i) interesting enough and (ii) obscure enough and (iii) funny enough to justify the minor digression. I mean, how can one read a statement like:
At Wells Fargo, the top arranger of loans to fossil-fuel companies last year, an activist chided the bank for donating to groups fighting climate change, “which is just Marxism dressed up as environmentalism.”
without snickering?
Or maybe people were just upset I mentioned the incredibly loose fiscal policy embodied in the Progressive Conservative’s election budget. It wasn’t really all that clear.
But anyway, April’s over, after delivering a 7.9% hit (as of the close yesterday; maybe 7.2% for the month but the TXPR TRIV is not yet available) [Update: The TXPR TRIV was 1765.52 at month-end, indicating a total return of -7.04% on the month]. Very strange, considering the abundance of FixedReset (Discount) issues and the 30-odd bp increase in the Five-Year Canada rate through the period. But then, if the preferred share market wasn’t strange, it would be boring!
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 3.81 % | 4.51 % | 25,397 | 18.53 | 1 | -0.6772 % | 2,507.2 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.4326 % | 4,857.0 |
| Floater | 4.19 % | 4.21 % | 37,313 | 16.97 | 4 | 0.4326 % | 2,799.1 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.3223 % | 3,562.0 |
| SplitShare | 4.71 % | 4.95 % | 48,727 | 3.45 | 6 | -0.3223 % | 4,253.8 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.3223 % | 3,319.0 |
| Perpetual-Premium | 5.76 % | 5.85 % | 77,323 | 14.07 | 16 | 0.4149 % | 2,965.3 |
| Perpetual-Discount | 5.76 % | 5.84 % | 67,854 | 14.12 | 17 | 0.7693 % | 3,219.3 |
| FixedReset Disc | 4.59 % | 5.94 % | 130,933 | 14.32 | 49 | 1.4952 % | 2,503.8 |
| Insurance Straight | 5.66 % | 5.77 % | 106,568 | 14.19 | 20 | 1.1195 % | 3,172.0 |
| FloatingReset | 4.71 % | 4.93 % | 70,775 | 15.62 | 2 | 1.2056 % | 2,589.2 |
| FixedReset Prem | 4.92 % | 4.81 % | 150,347 | 2.12 | 19 | 0.3010 % | 2,622.7 |
| FixedReset Bank Non | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 1.4952 % | 2,559.4 |
| FixedReset Ins Non | 4.65 % | 5.97 % | 86,018 | 14.01 | 15 | 0.6095 % | 2,583.3 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| MFC.PR.F | FixedReset Ins Non | -2.98 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 14.33 Evaluated at bid price : 14.33 Bid-YTW : 6.44 % |
| TRP.PR.B | FixedReset Disc | -2.68 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 12.70 Evaluated at bid price : 12.70 Bid-YTW : 6.94 % |
| PWF.PF.A | Perpetual-Discount | -2.68 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 20.00 Evaluated at bid price : 20.00 Bid-YTW : 5.66 % |
| BAM.PR.R | FixedReset Disc | -1.31 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 17.34 Evaluated at bid price : 17.34 Bid-YTW : 6.60 % |
| PVS.PR.I | SplitShare | -1.18 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-10-31 Maturity Price : 25.00 Evaluated at bid price : 25.10 Bid-YTW : 4.86 % |
| CM.PR.Q | FixedReset Disc | -1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 21.05 Evaluated at bid price : 21.05 Bid-YTW : 5.96 % |
| BAM.PF.J | FixedReset Prem | 1.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 23.66 Evaluated at bid price : 24.30 Bid-YTW : 5.95 % |
| RY.PR.N | Perpetual-Premium | 1.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 22.98 Evaluated at bid price : 23.25 Bid-YTW : 5.26 % |
| CU.PR.H | Perpetual-Premium | 1.16 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 22.37 Evaluated at bid price : 22.77 Bid-YTW : 5.85 % |
| TD.PF.M | FixedReset Prem | 1.16 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2024-07-31 Maturity Price : 25.00 Evaluated at bid price : 25.20 Bid-YTW : 4.74 % |
| BAM.PF.B | FixedReset Disc | 1.18 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 20.50 Evaluated at bid price : 20.50 Bid-YTW : 6.43 % |
| ELF.PR.F | Perpetual-Discount | 1.19 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 22.62 Evaluated at bid price : 22.87 Bid-YTW : 5.84 % |
| PWF.PR.E | Perpetual-Premium | 1.20 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 23.32 Evaluated at bid price : 23.60 Bid-YTW : 5.85 % |
| BIP.PR.F | FixedReset Prem | 1.21 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2023-12-31 Maturity Price : 25.00 Evaluated at bid price : 25.05 Bid-YTW : 5.25 % |
| FTS.PR.K | FixedReset Disc | 1.22 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 18.32 Evaluated at bid price : 18.32 Bid-YTW : 6.44 % |
| BMO.PR.Y | FixedReset Disc | 1.24 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 21.07 Evaluated at bid price : 21.07 Bid-YTW : 5.87 % |
| GWO.PR.L | Insurance Straight | 1.25 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 24.05 Evaluated at bid price : 24.30 Bid-YTW : 5.87 % |
| NA.PR.E | FixedReset Disc | 1.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 21.99 Evaluated at bid price : 22.58 Bid-YTW : 5.77 % |
| BAM.PF.A | FixedReset Disc | 1.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 21.89 Evaluated at bid price : 22.43 Bid-YTW : 6.22 % |
| IAF.PR.G | FixedReset Ins Non | 1.27 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 22.70 Evaluated at bid price : 23.85 Bid-YTW : 5.81 % |
| BAM.PF.G | FixedReset Disc | 1.29 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 19.65 Evaluated at bid price : 19.65 Bid-YTW : 6.52 % |
| BAM.PR.T | FixedReset Disc | 1.30 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 17.86 Evaluated at bid price : 17.86 Bid-YTW : 6.56 % |
| FTS.PR.M | FixedReset Disc | 1.38 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 19.79 Evaluated at bid price : 19.79 Bid-YTW : 6.37 % |
| TD.PF.K | FixedReset Disc | 1.57 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 22.32 Evaluated at bid price : 22.70 Bid-YTW : 5.76 % |
| MFC.PR.J | FixedReset Ins Non | 1.66 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 22.07 Evaluated at bid price : 22.70 Bid-YTW : 5.85 % |
| CU.PR.J | Perpetual-Discount | 1.67 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 20.70 Evaluated at bid price : 20.70 Bid-YTW : 5.84 % |
| CU.PR.G | Perpetual-Discount | 1.79 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 19.85 Evaluated at bid price : 19.85 Bid-YTW : 5.77 % |
| BAM.PR.Z | FixedReset Disc | 1.82 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 21.89 Evaluated at bid price : 22.40 Bid-YTW : 6.31 % |
| GWO.PR.T | Insurance Straight | 1.83 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 21.98 Evaluated at bid price : 22.25 Bid-YTW : 5.84 % |
| IFC.PR.A | FixedReset Ins Non | 1.83 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 18.35 Evaluated at bid price : 18.35 Bid-YTW : 6.02 % |
| GWO.PR.S | Insurance Straight | 1.84 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 22.26 Evaluated at bid price : 22.70 Bid-YTW : 5.83 % |
| BMO.PR.S | FixedReset Disc | 1.84 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 21.35 Evaluated at bid price : 21.35 Bid-YTW : 5.72 % |
| BAM.PF.H | FixedReset Prem | 1.86 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2025-12-31 Maturity Price : 25.00 Evaluated at bid price : 24.65 Bid-YTW : 5.58 % |
| BMO.PR.E | FixedReset Disc | 1.97 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 22.79 Evaluated at bid price : 23.20 Bid-YTW : 5.72 % |
| BAM.PF.D | Perpetual-Discount | 2.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 20.86 Evaluated at bid price : 20.86 Bid-YTW : 5.95 % |
| GWO.PR.G | Insurance Straight | 2.03 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 22.33 Evaluated at bid price : 22.60 Bid-YTW : 5.81 % |
| CU.PR.F | Perpetual-Discount | 2.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 19.97 Evaluated at bid price : 19.97 Bid-YTW : 5.74 % |
| TRP.PR.F | FloatingReset | 2.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 16.70 Evaluated at bid price : 16.70 Bid-YTW : 4.93 % |
| IAF.PR.B | Insurance Straight | 2.16 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 21.25 Evaluated at bid price : 21.25 Bid-YTW : 5.48 % |
| POW.PR.B | Perpetual-Premium | 2.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 22.77 Evaluated at bid price : 23.05 Bid-YTW : 5.85 % |
| MFC.PR.M | FixedReset Ins Non | 2.21 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 19.93 Evaluated at bid price : 19.93 Bid-YTW : 6.15 % |
| BAM.PR.C | Floater | 2.21 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 13.40 Evaluated at bid price : 13.40 Bid-YTW : 4.21 % |
| TD.PF.B | FixedReset Disc | 2.24 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 20.55 Evaluated at bid price : 20.55 Bid-YTW : 5.83 % |
| TD.PF.A | FixedReset Disc | 2.24 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 20.55 Evaluated at bid price : 20.55 Bid-YTW : 5.77 % |
| GWO.PR.H | Insurance Straight | 2.24 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 20.96 Evaluated at bid price : 20.96 Bid-YTW : 5.86 % |
| BAM.PF.F | FixedReset Disc | 2.25 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 20.45 Evaluated at bid price : 20.45 Bid-YTW : 6.57 % |
| RY.PR.J | FixedReset Disc | 2.35 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 21.45 Evaluated at bid price : 21.80 Bid-YTW : 5.75 % |
| CU.PR.C | FixedReset Disc | 2.36 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 21.42 Evaluated at bid price : 21.70 Bid-YTW : 5.94 % |
| BMO.PR.W | FixedReset Disc | 2.42 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 20.55 Evaluated at bid price : 20.55 Bid-YTW : 5.78 % |
| TD.PF.C | FixedReset Disc | 2.43 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 20.64 Evaluated at bid price : 20.64 Bid-YTW : 5.78 % |
| PWF.PR.S | Perpetual-Discount | 2.44 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 21.00 Evaluated at bid price : 21.00 Bid-YTW : 5.75 % |
| BAM.PR.X | FixedReset Disc | 2.44 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 17.60 Evaluated at bid price : 17.60 Bid-YTW : 6.45 % |
| CM.PR.P | FixedReset Disc | 2.46 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 20.83 Evaluated at bid price : 20.83 Bid-YTW : 5.73 % |
| TRP.PR.E | FixedReset Disc | 2.49 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 18.50 Evaluated at bid price : 18.50 Bid-YTW : 6.57 % |
| TD.PF.D | FixedReset Disc | 2.61 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 21.34 Evaluated at bid price : 21.65 Bid-YTW : 5.79 % |
| MFC.PR.C | Insurance Straight | 2.62 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 20.78 Evaluated at bid price : 20.78 Bid-YTW : 5.49 % |
| TRP.PR.D | FixedReset Disc | 2.74 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 18.75 Evaluated at bid price : 18.75 Bid-YTW : 6.60 % |
| RY.PR.Z | FixedReset Disc | 2.99 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 21.01 Evaluated at bid price : 21.01 Bid-YTW : 5.67 % |
| RY.PR.S | FixedReset Disc | 3.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 23.39 Evaluated at bid price : 23.75 Bid-YTW : 5.29 % |
| RY.PR.M | FixedReset Disc | 3.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 20.88 Evaluated at bid price : 20.88 Bid-YTW : 5.78 % |
| CM.PR.S | FixedReset Disc | 3.34 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 22.60 Evaluated at bid price : 23.20 Bid-YTW : 5.50 % |
| RY.PR.H | FixedReset Disc | 3.35 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 21.00 Evaluated at bid price : 21.00 Bid-YTW : 5.69 % |
| TRP.PR.A | FixedReset Disc | 3.62 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 17.18 Evaluated at bid price : 17.18 Bid-YTW : 6.50 % |
| CM.PR.O | FixedReset Disc | 4.75 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 20.95 Evaluated at bid price : 20.95 Bid-YTW : 5.78 % |
| MFC.PR.B | Insurance Straight | 5.03 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 21.30 Evaluated at bid price : 21.30 Bid-YTW : 5.54 % |
| BNS.PR.I | FixedReset Disc | 6.40 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 23.07 Evaluated at bid price : 23.45 Bid-YTW : 5.44 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| TD.PF.B | FixedReset Disc | 58,275 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 20.55 Evaluated at bid price : 20.55 Bid-YTW : 5.83 % |
| TD.PF.A | FixedReset Disc | 51,401 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 20.55 Evaluated at bid price : 20.55 Bid-YTW : 5.77 % |
| NA.PR.W | FixedReset Disc | 44,328 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 20.00 Evaluated at bid price : 20.00 Bid-YTW : 5.96 % |
| RY.PR.M | FixedReset Disc | 39,160 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 20.88 Evaluated at bid price : 20.88 Bid-YTW : 5.78 % |
| CM.PR.R | FixedReset Prem | 34,174 | YTW SCENARIO Maturity Type : Call Maturity Date : 2022-07-31 Maturity Price : 25.00 Evaluated at bid price : 24.98 Bid-YTW : 4.81 % |
| FTS.PR.J | Perpetual-Discount | 31,184 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-04-29 Maturity Price : 21.24 Evaluated at bid price : 21.24 Bid-YTW : 5.69 % |
| There were 13 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| GWO.PR.N | FixedReset Ins Non | Quote: 14.03 – 16.00 Spot Rate : 1.9700 Average : 1.1722 YTW SCENARIO |
| NA.PR.S | FixedReset Disc | Quote: 20.50 – 22.22 Spot Rate : 1.7200 Average : 1.2293 YTW SCENARIO |
| SLF.PR.J | FloatingReset | Quote: 15.20 – 17.00 Spot Rate : 1.8000 Average : 1.3687 YTW SCENARIO |
| PVS.PR.I | SplitShare | Quote: 25.10 – 27.35 Spot Rate : 2.2500 Average : 1.8256 YTW SCENARIO |
| TRP.PR.G | FixedReset Disc | Quote: 20.25 – 21.55 Spot Rate : 1.3000 Average : 0.9278 YTW SCENARIO |
| TD.PF.E | FixedReset Disc | Quote: 21.50 – 23.23 Spot Rate : 1.7300 Average : 1.4102 YTW SCENARIO |
On a fine Saturday morning, let’s play a little game of inversion.
Let’s say we are in an interest rate regime change. That is the 40 year bond bull market is coming to an end, and all the trendlines etc. you have seen for 10 year US bond do get breached. Etc. Etc.
In the short term, it’s possible that all preferreds get destroyed due to Fixed income sell off. But sooner or later, market can whiff out winners from losers, especially when interest rate regime change clobbers stocks and bonds equally.
The much maligned rate resets, especially floaters, have such a low duration. If 3 month GoC rises to say 4%(yeah, it used to be in that region, before the financial crisis) and prime rises to say 6%, all these floaters will stage a huge comeback. Or not, but they will all be yielding a good 6 to 7% at these rates.
Meanwhile, we have two fixed resets getting higher yields than perpetuals in a very long time, come Monday. CU.PR.C should reset at a yield of about 6% and ENB.PR.B should reset at above 6.5%. Perhaps higher for both of these.
This is a case of ‘inversion’ in the yield of preferreds, mostly because of pricing discrepancies.
See when the perpetuals were paying higher yield than rate resets, it made sense because of longer duration and the fear of negative interest rates. But now, we have a situation in which the rate resets are paying higher yields and have a 5 year duration, or potentially less. And based on how high the yields go, there’s a significant call potential with the rate resets.
Coming back to the regime change. If that scenario does indeed play out, we will see a further dump in perpetuals and rise in floaters/fixed resets.
All the floaters/resets that fell by a good 30 to 60% after 2015 yield falls can shine again while the perpetuals can fall.
How much? For how long?
I don’t know but I’m merely playing an inversion scenario.
Again, this is just a hypothetical. May be the demons of inflation will be slayed by the central bank gods this year and we can all enjoy our 6% yields perpetually.
“But sooner or later, market can whiff out winners from losers”
Yep. The trick is to stay solvent in the meantime and pay our bills with investment cashflow and/or paid work. Eventually markets will remember that rate resets are not bonds and they are actually floating rate products (albeit very temporally lumpy ones).
“May be the demons of inflation will be slayed by the central bank gods this year and we can all enjoy our 6% yields perpetually.”
And here is the rub. The main job of the CB is protecting the value of the Canadian dollar. Despite populist rhetoric, the CB is hard-wired and competently staffed, to make this happen. Therefore, inflation will be slayed but a recession is looking increasingly likely to be necessary to do it. In recessions, rates stop going up. We might not have more than another 0.5% to go. Still, this next increase will make the current prices of most resets look even more insanely cheap (e.g. ALA.PR.A would reset at a yield of 8.5% in 2025 after the next half point increase at Friday’s closing price).
The much maligned rate resets, especially floaters, have such a low duration.
It must be remembered that – for many arguments, not really the one made above – duration is a very tricky thing for issues with resettable yields.
For example, how does one treat the change in yield that might be expected for a FixedReset issue due to a rise in the GOC-5 yield? The contribution to the duration of the fixed part of the dividend rate – that is, until the next reset date – will change in accordance with classical bond theory, but what does one do about the remaining terms of the duration calculation? Does the change in GOC-5 mean you change the presumed reset rate, whatever it might be? And if so, how? I assume that for calculation purposes, the GOC-5 rate used at calculation time will be constant forever, but this is only an assumption. You could, for instance, take a view on market yields; perhaps assuming that that GOC-5 will change smoothly from its value at calculation time to another figure X years hence. Or you could use Current Yield (which assumes that GOC-5 will remain at its value as of the last reset calculation date forever, which I strongly deprecate but is never-the-less used by some.
There are two more problems associated with duration calculations for FixedResets, both of which derive from the fact that these are perpetuals, not five-year bonds: first, a change in yield due to a change in the assumption of the reset rates might well give you one result for duration; but a change in price due to a change in spread due to market conditions or one due to a change in perceived credit quality will give you a different result. Second, which is related to the first, the change in market conditions might be a change in slope of the underlying yield curve. While FixedReset dividend rates key off the five-year rate, they should logically be priced off the long-term rate, since they are perpetual instruments.
Determining the duration of a (deeply discounted) Straight Perpetual is a trivial exercise, but FixedResets have a lot of moving parts which classical bond analysis is simply not equipped to handle.
Meanwhile, we have two fixed resets getting higher yields than perpetuals in a very long time, come Monday. CU.PR.C should reset at a yield of about 6% and ENB.PR.B should reset at above 6.5%.
It will be recalled that the relative pricing – and the overall market level – of FixedResets was based on Current Yield for quite a long time, until the first reset of TRP.PR.A (at a dramatically reduced level) persuaded everyone that maybe throwing away the information contained in current GOC-5 yields was maybe not all that great an idea.
The current downdraft doesn’t really make a lot of sense and the closest I can come to rationalizing it is the idea that retail has decided it’s time for a Risk Off investment stance and FixedResets are considered a Risk Asset. The market appears to have incorporated current levels of GOC-5 (and well-founded expectations of an increase in dividend rates) into the pricing of these particular issues, but not so much into issues with more distant reset dates. I don’t think we have yet experienced a ‘TRP.PR.A moment’.
I’m quite sure that fundamentals will eventually reestablish themselves as the arbiters of market pricing, but it may take some time. Fortunately, we are paid to wait in the meantime.
What keeps going through my mind is the possibility of the CBs implementing Yield curve control (YCC) if inflation is not tamed. What would that do to our floating and rate reset preferreds? Most likely a negative effect.
We should be open to the possibility that inflation and rates will fall as the effects of higher rates percolates through the economy. There are already early signs of slowdown in Real Estate and with real estate driving most of growth and the wealth effect, we just might see the possibility of a weaker economy.
Structurally, this economy is very weak. Just look at the kinds of ‘innovative’ products we have- crypto, lending in crypto, perpetually loss making ‘startups’ that have been around for decades…and so forth. This ‘frothiness’, to put it very mildly, will vanish as soon as we go above zirp, as we have already seen in the massive decline in ‘growth’ stock prices. The broader indices are beginning to get impacted and it’s going to cause a massive negative wealth effect.
Ironically, this is really what the central banks want- a fall in asset prices- so that they don’t have to raise rates as much as they need to, in order to tame inflation.
Recall that back in 2008, we had a massive runup in commodities and inflation was hot, though not this hot. Real estate and stocks were booming and the central banks were on a mission to control inflation. We know how that unfolded. This time the financial system is much more solid, but general euphoria is much higher.
Yield curve control is possible, but the only time it was done here was after the 2nd war, when the US/Canada were structurally on a different trajectory and paying off national debt was a priority. Population was growing rapidly, there was a boom industrial sector, in fact the only functioning industrial sectors in the world at that time. Right now, there’s little growth in the economy and the high inflation we see is primarily due to the one off printing of money that was done during the pandemic. Most of it is gone.
YCC will require a massive central banking intervention and it’s possible that the results may not be very healthy. Just look at Japan that has been trying to keep its 10 year at 25bps. And the result in the fall of Yen has been very noticeable.
Despite all the ‘interest rate’ scenarios we discuss here, the most damage just might occur from a ‘risk off’ sentiment. In that scenario, irrespective of the rise or fall in rates, all risk assets will get clobbered, at least in the short term. We just saw IMHO, a trailer of that scenario. Imagine stocks falling by another 20% or more to return to the highs before the pandemic and then some more….What would it do the CPD/ZPR and other ETFs as people panic sell?
Again, for those clipping coupons, none of this should matter, other than the actual interest rates.
For those who actively trade, it’s a different set of considerations. Flexibility in one’s take on any issue is critical along with the recognition that we know nothing about how future will unfold.
I forgot to thank James for that detailed elaboration on the duration of fixed resets. Much appreciated.