16 Responses to “August 23, 2023”

1. fsabbagh says:

   August 24, 2023 at 10:50 am

   Hi,

   What if the North American central banks decide to follow the Japanese model? Why would they do that? Cause the interest payments are eating up the budget. I don’t think that the US or Canada can withstand much greater interest rates. Yeah sure, they can print more money but the inflation rate would be uncontrollable at that point. I know this is all a guess but I think our rate resets would take it in the chin and that perpetuals would be big time winners.

   One think I can say is that my perpetuals are being clobbered. Even the ones I bought last week are down 2.8% already. I am thinking of giving up on perpetuals for now and focusing on Rate Resets.

2. Yomgui says:

   August 24, 2023 at 12:03 pm

   Except for the fact that most RR have also dropped quite a bit over the last week or so.

   They drop in tandem… that’s cute :-/… but not totally unexpected.

   What surprises me a bit is that even RR that reset in 2024 are falling since I thought they would have held up better.
   BN.PF.F for example is set to get a fat yield of 11% (!!) in sept 24 using a GOC 5Yr yield of 4.0% and it lost like 5% in a very short amount of time.

3. Nestor says:

   August 24, 2023 at 12:07 pm

   “… I bought last week are down 2.8% already.”

   2.8% is the spread between the bid/ask on most prefs. on average.

4. Nestor says:

   August 24, 2023 at 12:13 pm

   “I thought they would have held up better.”

   the only ones i see that have held up well are the floaters. there’s been an immediate increase in dividends for those every 3 months this last year.
   (mfc.pr.p, slf.pr.j, pwf.pr.q, etc… )

   obviously within a range, but basically steady for the last 12 months.

   we might be in for another credit type event where everything gets flushed again. we’ll see. its’ obvious prefs are not going up, even though dividends are.

5. CaddilacMan says:

   August 24, 2023 at 12:39 pm

   Fsabbagh
   The way I approach it as follows:
   – I admit I don’t know where rates are going. Perhaps no one does.
   – It seems like the potential for rate decreases are already to some extent baked in to current RR prices.
   – It’s true that if rates go to zero à la Japan, RRs would be affected. But still the yields would not be that bad, relative to a 5 yr bond at 0%. So there is some downside cushion.
   – If rates decrease moderately, go sideways, or increase, RR will throw off big yields in the next few years as they reset.
   Putting it all together, I’m comfortable buying RRs at current prices and letting the cards flop as they will.

6. Avoid the Herd says:

   August 24, 2023 at 1:07 pm

   Yomgui, RR issues that will reset in 2024 / 25 look appealing with a 5 year GoC rate of 4%. However, consensus of bank economists is a projection of 3% for second half of next year. Plug in 3% and the yield to worst calcs for a given company line up fairly well.

   Of course, projections from economic forecasters can be just as dreadful as anything I may model. But the markets will respond to their numbers.

   Similar situation occurs when oil stocks are analyzed. Analysts won’t predict future commodity prices, instead they will use strip pricing which very frequently bears no resemblance to actual future transaction prices. In June 2022, the WTI strip sure wasn’t priced for $70 oil one year out.

7. Rod says:

   August 25, 2023 at 8:49 am

   The idea that RR’s should trade based on someone’s prediction of 5yr bond rates seems kind of silly to me. First, the bond yield itself is a prediction–what will inflation average over the next 5 years? What will risk-free real returns be? So then we add a prediction to the prediction–how will the prediction of inflation over the next five years change? Then we add a third prediction–How will RR’s respond to the predicted change in the prediction of inflation over the next five years?? I think as others have done–take the current yield (4%) as the expected yield in the future with higher and lower yields in some kind of bell curve.

8. Nestor says:

   August 25, 2023 at 9:02 am

   Bill Dudley penned an article in Bloomberg a few days ago. “Goodbye to the Bull Market for US Treasury Bonds”

   (https://www.bloomberg.com/opinion/articles/2023-08-22/goodbye-to-the-bull-market-for-us-treasury-bonds#xj4y7vzkg)

   interesting from a former fed official

9. Uub says:

   August 25, 2023 at 9:46 am

   Pref share market seems to be in a no win situation today no matter how we look at it. Actually makes sense how poor and under performing this market is:

   1) It’s bullish in a zero interest rate environment or direction. That path is gone for good, at least for next several decades. Higher for longer rates = pref shares continue its path steady bleed.

   2) If/when a material recession hits, pref shares will get crushed. That’s the only time to buy. Even so, rates likely not going to go down too much with bloated debt and issuance going forward.

   Either way, pref shares will keep going down.

10. Nestor says:

    August 25, 2023 at 9:51 am

    given today’s speech by Powell… expect rates to stay high and go higher if needed….

11. stusclues says:

    August 25, 2023 at 9:52 am

    “The idea that RR’s should trade based on someone’s prediction of 5yr bond rates seems kind of silly to me.”

    Me too. If we are to try to guess anything, we should try to guess the spread (to GOC5) that the market will demand for fixed resets in the future.

12. Rod says:

    August 25, 2023 at 9:57 am

    I agree. The spread is what counts. Higher or lower benchmark yields shouldn’t affect the value of the prefs. Don’t we all remember the conventional wisdom that RRs decline in value with interest rates? It was true until it wasn’t. Now we don’t hear that conventional wisdom any more!

13. Nestor says:

    August 25, 2023 at 10:34 am

    all you can do is take advantage of the mispricing that is occurring. get paid well in the meantime, and wait until spreads return to normal.

14. jiHymas says:

    August 25, 2023 at 10:58 am

    The spread is what counts.

    I agree with this wholeheartedly, but one nuance that is often forgotten is “the spread to what?”.

    Resets and extendibles of all kinds are sold to the unwary as having whatever risk profile the dealer can convince them they have and therefore, in general a higher advertised spread to a lower yielding benchmark than might result from a more rigorous analysis.

    The market’s trust in the sales-talk of the dealers has irritated me for about thirty-years now, particularly with respect to bank sub-debt: for instance, see the post BofA Maple Sub-Debt: Pretend-Maturity Will Be Ignored.

    So, with respect to FixedReset preferreds, what should the benchmark be? I say the proper benchmark is long-term corporates, not five-year Canadas. This will make no difference within the class, in terms of rank-ordering, but may make a huge difference when comparing spreads with competing asset classes.

    As the saying goes, the three most important things about investing in fixed income are credit, credit and credit. The choice of benchmark may not make a lot of difference now, but what if we segue into an environment of a steep yield curve and a wider credit spread? FixedResets should suffer in such an environment, even if their spread to five-year Canadas remains unchanged and this suffering will result in a sharply higher and completely forseeable increase in the spread to five-year Canadas.

15. stusclues says:

    August 25, 2023 at 11:14 am

    “I say the proper benchmark is long-term corporates, not five-year Canadas”

    I agree with this. Changes in the steepness of the yield curve should impact the spread to GOC5. A steeper curve ought to cause the market to demand a higher spread to GOC5 and a shallower curve the opposite.

    So if the fixed reset market was logical and could be trusted to tell us something, it would be saying that the curve is about to steepen dramatically (very). Of course, I don’t believe fixed reset market is this smart and it is telegraphing the cumulative effect of poor analyses. The big counter bet here is that the curve will not steepen nearly as dramatically as required to justify current spreads and blowout current situation will normalize.

16. August 30, 2023 « PrefBlog says:

    August 31, 2023 at 9:34 am

    […] PerpetualDiscounts now yield 7.14%, equivalent to 9.28% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.40% on 2023-8-25 and since then the closing price has changed from 14.52 to 14.56, an increase of 28bp in price, with a Duration of 12.07 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decrease in yield of about 2bp since 8/25 to 5.38%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained constant at the 390bp reported August 23. […]