8 Responses to “June 18, 2024”

1. Le_bib says:

   June 19, 2024 at 7:44 am

   Trying to understand the logic here.

   BoC lowered rate which means yields from no-risk fixed income products like HISA or GICs should go down.

   Which should mean 5YR already reset preferred should get MORE attractive.

   But their prices went down. I’ll take ENB as an example since they have many preferred that reset lately so with dividends locked until 2019 (ENB-P, ENB-T, ENB-J..)
   Markets priced them to yield 8% until BoC lowered the interest rate.

   Then preferred prices went down by 5-6% so they now yield 8.5%

   What am I missing?

2. stusclues says:

   June 19, 2024 at 7:55 am

   “What am I missing?”

   FR preferred shares are perpetual investments (with a risk of getting called of course). Yields to the next reset date are temporary and only a part of the long term dividend stream being purchased. Current yields shouldn’t be the driving factor in their purchase but they clearly are for some investors.

3. Le_bib says:

   June 19, 2024 at 8:49 am

   Yes of course.

   But it still strike me as being quite counter intuitive.

   Let’s take MFC-K

   Just before rate cut on June 3rd it was at $23.88 and 5YR rate was 3.6%
   Which meant $1.59 div for next 4 years then $1.46 at current 5YR.
   Or 6.7% next 4 years then 6.1% after

   Now it’s trading at $22.49 with 3.32% 5YR.
   So $1.59 next 4 years then $1.39 after at current 5YR.
   Or 7.1% next 4 years then 6.2%.

   So now that there has been a rate cut from BoC, markets are demanding more yield from current period (next 4 years) AND more yield in the future.

   So preferred markets are either/or:
   A) pricing in lower 5YR rate than current ones
   B) pricing markets to want a larger % spread vs no-risk yield
   C) giving preferred some premiums due to uncertainty

   A) perhaps
   B) that one bugs me
   C) makes sense

4. stusclues says:

   June 19, 2024 at 12:06 pm

   Interesting choice of example. If we analyze the MFC issues using James’ Implied Volatility Theory, MFC.PR.K is the most expensive (least cheap) FR in MFC family. I gave up trying to dissect short term price movements in FR. IVT is one way of determining longer term relative cheapness among issues from the same issuer.

   IMO, B) is the most clue here. C) is a expressed in B). Since October last year, the blow out spreads (discount FRs to GOC5) demanded by the market have been falling steadily but are still very elevated.

5. IrateAR says:

   June 19, 2024 at 12:11 pm

   I think at some point you have to give up and just accept it as markets being markets.

   You can wave vaguely in the direction of the rate cut or the capital gains changes or just think that all the redemption money has pushed things “too high” but none of it adds up to a very satisfying explanation of the current downtrend.

6. Le_bib says:

   June 19, 2024 at 1:56 pm

   @stusclues : first, thanks a lot for taking the time to answer.

   As for picking MFC-K as an example, it’s really the first one I saw on my spreadsheet, I don’t any of it nor was considering buying it.

   I did notice the demanded discount going down recently and I thought it was maybe due to markets giving higher possibilities of shares being redeemed since many financial preferred were redeemed lately.

   Looking at chart B-5 in James newsletter I see there is a very strong correlation between FR yield and GOC5 so I’m not that crazy to be surprised to see both not going into same direction since BoC announcement.

   Seems FR market gets comfortable when things are stable and gets nervous when things move. That’s good to know.

   Thanks again.

7. stusclues says:

   June 19, 2024 at 2:26 pm

   “Seems FR market gets comfortable when things are stable and gets nervous when things move.”

   I think this is a good observation 🙂

8. Le_bib says:

   June 19, 2024 at 4:29 pm

   The difference between FR yield and GOC5YR went from about 3% to 4% almost overnight. I can’t say I saw this coming and that’s what I was trying to find why it happened.

   Seems to be markets demanding a larger gap between the two when there is more volatility.