![](\"http:\/\/www.prefblog.com\/wp-content\/uploads\/2010\/03\/yields_big.jpg\")
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In the past year, FixedReset yields have declined from 5.72% to 3.46%, while PerpetualDiscounts have declined from 7.29% to 6.01%. Thus, the spread has widened from 157bp to 255bp – although it is dangerous and misleading to talk of the spread between these two classes, since FixedResets may now, by and large, be confidently expected to be called at the first opportunity. Thus, the basis risk that existing at the beginning of the period (more inclined to inflation protection) is not the same as the basis risk that exists now (more inclined to term spread).<\/p>\n
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Duration and positive carry have enabled PerpetualDiscounts to outperform in the face of widening. At the current spread of 255bp and Modified Duration of 16.7, and assuming a constant future yield on FixedResets, the breakeven change in spread is a widening of about 15bp p.a.<\/p>\n
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The past year’s outperformance by FixedResets in yield terms is consistent with the increase in the Breakeven Inflation Rate on Long Nominals vs. Long RRBs.<\/p>\n
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… and longer term data is consistent with the idea that this is finished.<\/p>\n
No chart for this one, but LongCorporate investors do not share any inflation fears that PerpetualDiscount investors might have; the spread between interest-equivalent PerpetualDiscounts and Long Corporates (the Seniority Spread) has increased dramatically of late.<\/p>\n
Update, 2010-3-20<\/b>: OK, here are some more charts:<\/p>\n