10 Responses to “June 17, 2024”

1. IrateAR says:

   June 18, 2024 at 11:28 am

   Same routine today… CM doing an LRCN and CM.PR.O went to $25.

2. sonoffergus says:

   June 18, 2024 at 12:47 pm

   Hi James.

   First off, thank you so much for doing what you do! Your research and market info has been absolutely invaluable to me as I have jumped into prefs after decades away — so long ago that I (luckily) missed the birth of fixed resets.

   I am doing my best to understand the market and relative pricing, and am absolutely flummoxed by old-school floaters like PWF.PR.A at $12.50 bid.

   I read your research, including the classic “Some Preferred to Float Your Boat” from 2009, in which you scratch your head pretty hard as to why prices exhibit high volatility in the absence of credit concerns. The PWF straight perps trade in the $22 range (and PWF is a great credit of course), so credit doesn’t explain the 50% discount.

   I note that you have allocated a tiny amount of Malachite to floaters. Am I right in assuming that you are done with fighting Mr. Market on these types of floaters despite their screaming cheapness?

   I have committed some capital to the BPO floaters on the theory that a reduction in yield should be more than offset by the presumed increase in credit quality that lower rates will bring. Am I crazier than usual?

   Thx and best.

3. niagara says:

   June 18, 2024 at 3:35 pm

   CIBC issuing NVCC AT1 Limited Recourse Capital Notes:

   https://cibc.mediaroom.com/2024-06-18-CIBC-to-Issue-6-987-NVCC-AT1-Limited-Recourse-Capital-Notes

   I assume that these will be used to redeem CM.PR.O and CM.PR.Y”
   “The net proceeds to CIBC from the sale of the LRCNs will be used for general corporate purposes, which may include the redemption of outstanding capital securities of CIBC, and/or the repayment of other outstanding liabilities of CIBC.”

4. niagara says:

   June 18, 2024 at 3:38 pm

   Sorry, IrateAR, I didn’t see that you had already posted that!

   TD also has two pref issues up for reset/redemption on Jul 31: TD.PF.B and TD.PF.M. Haven’t seen any announcement of if they are going to be redeemed…I am assuming so, esp “M” which has a 356bp reset spread. Would hate to see retail investors get a decent rate…

5. CM Issues LRCNs: CM.PR.O & CM.PR.Y To Be Redeemed, Maybe? « PrefBlog says:

   June 18, 2024 at 10:46 pm

   […] to Assiduous Readers IrateAR and niagara for bringing this to my […]

6. IrateAR says:

   June 19, 2024 at 7:30 am

   No worries yours had more info.

   Yep nothing from TD yet. It would be a shock if the TD.PF.M doesn’t go but TD.PF.B closed at 24.35 so there’s some uncertainty there. The market seems to have the least confidence in TD calling due to the AML issues.

7. jiHymas says:

   June 19, 2024 at 9:23 am

   I note that you have allocated a tiny amount of Malachite to floaters. Am I right in assuming that you are done with fighting Mr. Market on these types of floaters despite their screaming cheapness?

   HIMIPref™ doesn’t get emotional or make macro calls … it just weighs packages of cash flows and attempts to buy the cheapest packages available subject to various constraints.

   Everybody tries to do this, even the guy who puts $1,000 into Consolidated Moose Pasture Mining Co. because when he discounts his expected future value of $1,000,000, he comes up with an expected rate of return that’s hard to beat. The market is a discounting mechanism; zealots and evangelists for the Efficient Markets Hypothesis will tell you it’s a perfect discounting mechanism, but this is horse patootie: it ignores the requirement for and the the consequent value of liquidity. And it’s well known that the bond market is excitable – so are all the others. So you can make a nickel simply by buying what the market wants to sell and selling what the market wants to buy, just like any used car dealer.

   But anyway, let’s look at PWF.PR.A, since you mention it. It pays 70% of prime on its par value and closed yesterday at 12.70. We’ll compare it to PWF.PR.R, the most liquid of PWF’s many issues, which pays 1.375 p.a. and closed yesterday at 20.70.

   Your mission, should you choose to accept it, is to determine which package of cash flows is cheaper.

   The projected Current Yield of PWF.PR.A is:
   0.7 * P * 25 / 12.70

   The projected Current Yield of PWF.PR.R is:
   1.375 / 20.70

   Set them equal and learn that:
   P = 4.82%

   So if Prime exceeds 4.82% to perpetuity, on average, then (ignoring timing effects) then PWF.PR.A will provide more money than PWF.PR.R. If it’s less than 4.82%, PWF.PR.R wins.

   “Everybody knows” short term rates are going to decline in the near future and therefore “everybody knows” floating rate preferreds are horrible investments. And the market has discounted this and is forecasting an immediate and permanent decline of prime from its current level of 6.95% to 4.82% … slightly over 200bp.

   That implies an immediate and permanent decline of the BoC policy rate from its current level of 4.75% to a little under 2.75% – slap in the middle of the BoC’s currently estimated r-star neutral rate range of 2.25% – 3.25%.

   So on this basis, PWF.PR.A and PWF.PR.R are equally valued. But it may be pointed out that a decline of 200bp in the policy rate will not be “immediate” and may not even happen at all. So a holder of PWF.PR.A will get a little bonus on top of fair value. So on this basis, a modest investment in PWF.PR.A does not – subject to a review of your actual portfolio’s ability to meet its mandate – appear to be a completely insane idea.

   Of course, maybe the market knows all this and has decided that the permanent rate of Prime will be just sufficently lower than 4.82% to counterbalance the time it takes to reach this figure. I will leave it to you to create complicated graphs relating the level of permanent prime to the time it takes to reach this level in order for present values to be equal, given assumptions about the precise path.

   You may, of course, put an enormous amount of money into this idea and find out tomorrow that the successful demonstration of a Perpetual Motion Machine has resulted in the price of energy being cut to zero, resulting in depression and the immediate, global reduction of all central bank policy rates to 0.05%. But that’s why you diversify.

8. jiHymas says:

   June 19, 2024 at 9:53 am

   I have committed some capital to the BPO floaters on the theory that a reduction in yield should be more than offset by the presumed increase in credit quality that lower rates will bring. Am I crazier than usual?

   In this case you’re using a Credit Anticipation strategy to hedge a speculation on Prime. So the analysis above will get more complex by the addition of assumptions relating credit quality of BPO to Prime, followed by assumptions relating credit quality to price. I’ll leave you to it!

   I will remind you, though, of the old adage that the three most important things in fixed income analysis are credit, credit and credit. If BPO defaults, you’ll lose all your money, even if Prime has gone to 100%.

9. peet says:

   June 19, 2024 at 11:44 am

   “I note that you have allocated a tiny amount of Malachite to floaters”

   James. thank you for your detailed post.

   I note you assume a spread of 200 bps between the BOC policy rate and Prime. FWIW, I also hold PWF.PR.A and hold the same assumption. My source at the time of purchase was https://wowa.ca/banks/prime-rates-canada and also a good graph:

   “The Prime rate has a very close relationship with the Bank of Canada target overnight rate. Since the late 1990s, the Prime rate has stayed within a 50 basis point range around 200 basis points … above the Bank of Canada rate.”

   So there are shorter term variations but 2% is good enough.

10. peet says:

    June 19, 2024 at 12:29 pm

    James, on a re-read: my apologies, I misspoke when I wrote you “assumed” something like a 2% spread over Prime for the floater. You came from a different direction so a better way for me to have put it would have been to say that your result is consistent with PWF.PR.A being within that fairly narrow band of around 200 basis points above the policy rate.