Another day of good returns and good volume for preferreds, with PerpetualDiscounts gaining 5bp and FixedResets up 12bp, taking the median-weighted-average yield for the latter index down to yet another new low of 3.69%. How low can they go?
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| 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 | 0.4983 % | 1,532.4 |
| FixedFloater | 5.72 % | 3.86 % | 41,220 | 18.96 | 1 | 2.9794 % | 2,723.5 |
| Floater | 2.56 % | 2.99 % | 97,023 | 19.76 | 3 | 0.4983 % | 1,914.4 |
| OpRet | 4.87 % | -2.60 % | 138,520 | 0.09 | 15 | 0.0562 % | 2,314.4 |
| SplitShare | 6.43 % | -5.11 % | 254,766 | 0.08 | 2 | 0.1332 % | 2,089.8 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0562 % | 2,116.3 |
| Perpetual-Premium | 5.87 % | 5.80 % | 80,709 | 2.34 | 7 | 0.2106 % | 1,879.0 |
| Perpetual-Discount | 5.79 % | 5.84 % | 199,252 | 14.02 | 68 | 0.0525 % | 1,796.8 |
| FixedReset | 5.41 % | 3.69 % | 354,037 | 3.88 | 41 | 0.1151 % | 2,162.3 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BMO.PR.K | Perpetual-Discount | -1.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-12-15 Maturity Price : 22.99 Evaluated at bid price : 23.15 Bid-YTW : 5.72 % |
| BAM.PR.B | Floater | 1.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-12-15 Maturity Price : 13.13 Evaluated at bid price : 13.13 Bid-YTW : 2.99 % |
| BAM.PR.G | FixedFloater | 2.98 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-12-15 Maturity Price : 25.00 Evaluated at bid price : 19.01 Bid-YTW : 3.86 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BMO.PR.L | Perpetual-Discount | 88,335 | RBC crossed 79,100 at 25.13. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-12-15 Maturity Price : 24.84 Evaluated at bid price : 25.07 Bid-YTW : 5.84 % |
| CU.PR.B | Perpetual-Premium | 72,900 | RBC crossed 72,400 at 25.15. YTW SCENARIO Maturity Type : Call Maturity Date : 2012-07-01 Maturity Price : 25.00 Evaluated at bid price : 25.20 Bid-YTW : 5.80 % |
| TD.PR.N | OpRet | 67,000 | RBC crossed 25,000 at 26.30; TD crossed 35,000 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2010-01-14 Maturity Price : 26.00 Evaluated at bid price : 26.25 Bid-YTW : -0.64 % |
| TD.PR.O | Perpetual-Discount | 55,608 | Nesbitt crossed 37,200 at 22.90. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-12-15 Maturity Price : 22.72 Evaluated at bid price : 22.90 Bid-YTW : 5.36 % |
| RY.PR.X | FixedReset | 51,653 | RBC crossed 27,000 at 28.00. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-09-23 Maturity Price : 25.00 Evaluated at bid price : 28.00 Bid-YTW : 3.63 % |
| MFC.PR.A | OpRet | 40,860 | Nesbitt crossed 35,500 at 26.43. YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2015-12-18 Maturity Price : 25.00 Evaluated at bid price : 26.32 Bid-YTW : 3.14 % |
| There were 43 other index-included issues trading in excess of 10,000 shares. | |||
James,
Perhaps it’s time to start tracking the seniority spread between long corporates and fixed resets too. By the eyeball it appears to be about -50 basis points on a tax equivalency basis for the priviledge of subordination and no fixed term. :O
I’ve thought about that, but it gets really messy.
The overwhelming majority of investment-grade FixedResets are highly likely to be called at the first opportunity. Their yield of 3.69% is equivalent to 5.17% interest, while short corporates yield about 2.6% – so the seniority spread as far as that goes is about 250bp, a little bit more than the seniority spread for PerpetualDiscounts.
But there’s extension risk with the FixedResets, as you point out. This would need to be priced as an option, which means estimating the volatility of the Market Reset Spread, which makes the whole thing rather complex – especially since you’d really need to do a different option pricing for each Issue Reset spread in the index to come up with a proper overall option value.
A nightmare!