Bob Eisenbeis, Chief Monetary Economist at Cumberland Advisors, has posted a good commentary on Contingent Capital.
It was a mixed day for preferred shares, with PerpetualDiscounts down 10bp and FixedResets up 11bp – which took the weighted median yield-to-worst of the latter class down to 3.75%. How low can it go? The five lowest yields recorded on the FixedReset index have been observed on the last five trading days. Volume returned to normal levels.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
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| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1538 % | 1,504.4 |
| FixedFloater | 6.04 % | 4.16 % | 37,390 | 18.59 | 1 | 0.1669 % | 2,578.8 |
| Floater | 2.59 % | 3.04 % | 97,849 | 19.55 | 3 | 0.1538 % | 1,879.5 |
| OpRet | 4.87 % | -3.81 % | 140,288 | 0.08 | 15 | -0.1555 % | 2,306.9 |
| SplitShare | 6.37 % | -6.89 % | 271,118 | 0.08 | 2 | -0.3067 % | 2,108.3 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1555 % | 2,109.4 |
| Perpetual-Premium | 5.88 % | 5.83 % | 60,931 | 6.00 | 7 | -0.3065 % | 1,874.6 |
| Perpetual-Discount | 5.81 % | 5.88 % | 184,910 | 14.03 | 67 | -0.1012 % | 1,788.1 |
| FixedReset | 5.42 % | 3.75 % | 366,983 | 3.90 | 41 | 0.1056 % | 2,155.6 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BMO.PR.H | Perpetual-Discount | -1.68 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-12-07 Maturity Price : 22.61 Evaluated at bid price : 23.36 Bid-YTW : 5.68 % |
| BAM.PR.J | OpRet | -1.46 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2018-03-30 Maturity Price : 25.00 Evaluated at bid price : 26.41 Bid-YTW : 4.75 % |
| MFC.PR.B | Perpetual-Discount | -1.37 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-12-07 Maturity Price : 19.40 Evaluated at bid price : 19.40 Bid-YTW : 6.02 % |
| CM.PR.R | OpRet | -1.37 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2010-01-06 Maturity Price : 25.60 Evaluated at bid price : 25.94 Bid-YTW : -5.24 % |
| GWO.PR.I | Perpetual-Discount | -1.15 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-12-07 Maturity Price : 18.98 Evaluated at bid price : 18.98 Bid-YTW : 5.94 % |
| BMO.PR.K | Perpetual-Discount | -1.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-12-07 Maturity Price : 23.33 Evaluated at bid price : 23.51 Bid-YTW : 5.62 % |
| PWF.PR.K | Perpetual-Discount | 1.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-12-07 Maturity Price : 21.07 Evaluated at bid price : 21.07 Bid-YTW : 5.96 % |
| HSB.PR.D | Perpetual-Discount | 1.27 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-12-07 Maturity Price : 22.21 Evaluated at bid price : 22.35 Bid-YTW : 5.70 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| PWF.PR.M | FixedReset | 212,750 | National Bank crossed two blocks at 27.25, of 200,000 and 10,000 shares. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-02 Maturity Price : 25.00 Evaluated at bid price : 27.18 Bid-YTW : 3.90 % |
| SLF.PR.B | Perpetual-Discount | 79,596 | RBC crossed 60,000 at 20.10. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-12-07 Maturity Price : 20.02 Evaluated at bid price : 20.02 Bid-YTW : 6.01 % |
| TRI.PR.B | Floater | 75,000 | RBC crossed two blocks at 19.75, of 50,000 and 25,000 shares. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-12-07 Maturity Price : 19.75 Evaluated at bid price : 19.75 Bid-YTW : 2.01 % |
| TRP.PR.A | FixedReset | 73,585 | Scotia crossed 50,000 at 25.85. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-01-30 Maturity Price : 25.00 Evaluated at bid price : 25.86 Bid-YTW : 3.80 % |
| SLF.PR.D | Perpetual-Discount | 62,748 | RBC crossed 60,000 at 18.75. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-12-07 Maturity Price : 18.71 Evaluated at bid price : 18.71 Bid-YTW : 5.96 % |
| BAM.PR.B | Floater | 56,648 | RBC crossed 50,000 at 13.06. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-12-07 Maturity Price : 13.06 Evaluated at bid price : 13.06 Bid-YTW : 3.04 % |
| There were 36 other index-included issues trading in excess of 10,000 shares. | |||
How low can it go? Perhaps the supplementary question should be: How much will be lost on fixed/resets? There are a lot of folks who are embracing the rate reset feature as an extremely valuable thing. It would appear that they have completely discounted the possibility that resetting of the dividend will not be in their best interest. I find that rather curious when you consider that the option is in the hands of the issuer and not the holder.
You’re quite right and I am continually astounded at the rationales people will force themselves to believe in to justify their choices.
I suspect that in 2013/14, when most of the current issuance (almost certainly) gets called, there will be a lot of people quite upset at a capital loss equal to a year-and-a-half’s dividends.