{"id":2265,"date":"2008-06-16T14:12:22","date_gmt":"2008-06-16T18:12:22","guid":{"rendered":"http:\/\/www.prefblog.com\/?p=2265"},"modified":"2008-06-16T14:12:22","modified_gmt":"2008-06-16T18:12:22","slug":"negative-convexity-negative-schmonvexity","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=2265","title":{"rendered":"Negative Convexity? Negative Schmonvexity!"},"content":{"rendered":"<p>In the <a href=\"http:\/\/www.prefblog.com\/?p=2256#comments\">comments to another post<\/a>, Assiduous Reader <i>mpisni<\/i> asks:<\/p>\n<blockquote><p>Hi James, Recently we have seen issues rated at lower ratings take some big hits ( FTS, SLF, ) but the recent issues in the 5.6% to 6 % range have remained relatively unaffected.<\/p>\n<p>Is this because of the dividend rate, higher ratings ?<\/p>\n<p>How will these issues prices be effected down the road and how much will rates have to increase to see negative effects on their prices<\/p>\n<p>Thanks James<\/p><\/blockquote>\n<p>I don&#8217;t really have a LOT of time to deal with this right now, but &#8230;<\/p>\n<p>I&#8217;ve uploaded <a href=\"http:\/\/www.prefblog.com\/wp-content\/uploads\/2008\/06\/perpdisc_080613.xls\">an Excel Spreadsheet<\/a> showing the following data:<\/p>\n<ul>\n<li>ticker\n<li>5\/30 YTW\n<li>5\/30 Price\n<li>DBRS Rating\n<li>Total Return 5\/30-6\/13 (bid side)<\/ul>\n<p>The spreadsheet includes a graph!<\/p>\n<div align=\"center\"><img decoding=\"async\" src=\"http:\/\/www.prefblog.com\/wp-content\/uploads\/2008\/06\/priceret_perpdis_080613.jpg\"><\/div>\n<p>You can play with these data as much as you like &#8230; and if anybody can answer any of <i>mpisni<\/i>&#8216;s questions (particularly the implicit &#8220;When will this be over?&#8221; part) &#8230; let me know!<\/p>\n<p>If I had to give an answer and if my answer had to assume rationality of the market over any given two-week period (both of these are rather big ifs), I&#8217;d suggest that one hypothesis to test would be that<\/p>\n<ul>\n<li>The market is anticipating further increases in long yields\n<li>Therefore, it is marking the &#8220;negative convexity&#8221; yield-premium down really low, since it assumes that there is no potential for capital gains being given up<\/ul>\n<p>See <a href=\"http:\/\/www.prefblog.com\/?p=1640\">my article on convexity<\/a> if you don&#8217;t have a clue what I&#8217;m blathering about.<\/p>\n<p><b>Update<\/b>: Note that this is a hot issue because it appears the preferred share market has hit <a href=\"http:\/\/www.prefblog.com\/?p=2257\">a new 15-month trough<\/a> &#8230; particularly, I think, when today is finally over!<\/p>\n<p><b>Update<\/b>: OK, there are two more possibilities:<\/p>\n<ul>\n<li><b>The price paid for convexity was too much on 5\/30; the market&#8217;s just readjusting<\/b> &#8230; well &#8230; all I can say is: I don&#8217;t buy it.\n<li><b>Brokers are dumping their losers<\/b>. Retail stockbrokers seek to avoid criticism. They&#8217;ve been getting worried calls from unsophisticated clients all year about &#8216;How come that new issue you sold me is down so much?&#8217; They&#8217;re making the judgement that, at the very least, recovery is not imminent and simply dumping it. The near-par stuff isn&#8217;t getting dumped because they&#8217;re not getting any calls about that stuff.<\/ul>\n<p><b>Update<\/b>: Yet another possibility! I know of at least one stockbroker who, last November, was aggressively getting his clients into preferreds on the grounds that when the BCE issues got redeemed, a tsunami of money would boost prices of existing issues.<\/p>\n<p>Some such clients might be getting a little dubious about the &#8220;when&#8221;.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In the comments to another post, Assiduous Reader mpisni asks: Hi James, Recently we have seen issues rated at lower ratings take some big hits ( FTS, SLF, ) but the recent issues in the &hellip;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[10],"tags":[],"class_list":["post-2265","post","type-post","status-publish","format-standard","hentry","category-index-construction-and-reporting"],"_links":{"self":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/2265","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=2265"}],"version-history":[{"count":0,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/2265\/revisions"}],"wp:attachment":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=2265"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=2265"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=2265"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}