8 Responses to “June 16, 2023”

1. paullo says:

   June 17, 2023 at 10:15 am

   Apologize in advance if this is posted in the wrong area – first time poster; long time follower. I have been thinking about the people who advocate for investing based on YTW. Please help me understand how you think about the following situation. As an example, FTS.PR.M and FTS.PR.H. With the current 5 year GoC at 3.72%; YTW favours FTS.PR.H whereas if the 5 year GoC was to be at 0.72%, YTW would favour FTS.PR.M. I realize the 0.72% is historically low and arbitrary but the 5 year has been there in the last year. One could argue that the 3.72% from a 10 year perspective is more of an outlier. Do people use a modified 5 year rate (10 year average?) for their calculation or is there something that I am missing? Thanks in advance.

2. stusclues says:

   June 17, 2023 at 1:28 pm

   “first time poster; long time follower.”

   If you are a long time follower, why don’t you use Implied Volatility Theory or another plausible method based on spreads? If you did, you’d see that FTS.PR.H is a much better purchase based on current pricing.

3. jiHymas says:

   June 17, 2023 at 1:30 pm

   It’s a good question.

   The rate you use is a projection. It’s an estimate that is supposed to last until the end of time and the only thing you can be sure of is that it will be wrong.

   So there’s no compelling reason to favour one number over another. As with every other investment, you pays yer money and you takes yer chances.

   I use the current rate because I feel that is the rate that I feel will ‘minimize regret’. If I were to use 0.72% and rates stayed constant, I will regret my decision. However, if rates move three points in the other direction and find a good place at 6.72%, I will regret my decision even more.

   If I assujme that interest rates are a random walk, I will end up with a probability distribution centered on 3.72% but with a variance – the probability distribution will be a normal ‘bell’ curve. But I could equally well assume that the long-term expected value of the five-year Canada rate would be, say, 3.00% and that whatever the current rate might be, it will change steadily to 3.00% over the next five years and stay there forever. Then I could do more complicated calculations, with the next reset happening with GOC-5 equal to some intermediate number and all resets after that happening with GOC-5 = 3.00%.

   I use the assumed future rate as a ranking mechanism, not as an asset allocation mechanism. Dynamic asset allocation is a version of market-timing and I abhor it. However, once you have assessed your asset allocation – preferably while taking the whole probability distribution into consideration, not just a tiny fragment of it – you have to choose which ones to own.

   The choice of the future rate will have an influence on choice, sure, as your example of FTS.PR.M / FTS.PR.H illustrates (although I confess I haven’t checked it). But the important thing is that all instruments be ranked using the same projection; the actual projection is, relatively speaking, a mere detail.

   I use the current rate. It’s unambiguous and does not depend on my mood or the latest headline. You can use whatever rate you like – the Projection Police aren’t going to jump up and take you away. But I will suggest that using the current rate will both recognize your fallibility as a forecaster and have a decent shot at allowing you to adjust your portfolio as economic conditions change.

4. jiHymas says:

   June 17, 2023 at 1:34 pm

   I should also point out that YTW is just one of many ‘reward’ attributes that is used by my software, HIMIPref™ to determine valuation.

5. jiHymas says:

   June 18, 2023 at 8:19 am

   Also, note this comment by Assiduous Reader skeptical in the dark days of March, 2020:

   I used to do stress testing for many issues assuming 5 year GOC of zero. I’ve started buying issues that are great value even at GOC 5 year of -1%. All top notch investment grade issues yielding between 3.75 to 4.5% with -1% GOC. How can you beat that?

6. Yomgui says:

   June 18, 2023 at 6:17 pm

   Good comment indeed.

   I doubt mine will be good too but I give it a shot.

   Since nobody knows where yields will be in 1, 3, 5, 10 years, etc. it might be wise to (among other things) have a RR portfolio with “high floor” and “high ceiling” issues.
   To that end, it can be useful to build an Excel spreadsheet showing what yield any issue would reset at if the GOC 5yr was anywhere from 50bps to 350bps.

   To only take 2 exemples, “high floor” could be BIP.PR.F since no matter what happens in the future, at $19.1 you are sure to get a solid 6.7% forever (but “only” about 8.4% assuming the 5yr at 3.5%) … and “high upside” could be BN.PR.R which, at $13 would yield 5.4% if it resets when the 5yr is at 0.5% / still pretty decent / but it would jump at about 11% (!) with the GOC 5 yr at 3.50%.

7. paullo says:

   June 19, 2023 at 1:17 pm

   Thanks for the help.

8. Nestor says:

   June 21, 2023 at 6:44 am

   5 year Canada rates getting really close to the Oct 19, 2022 peak…