It is clear that for short term price changes of this magnitude, the ordering of comparable issues by Current Yield is likely to be more stable than orderings by other methods, an observation that is consistent with the FixedReset data examined in the May, 2010, edition of this newsletter.<\/p>\n
However, Current Yield is not a particularly good predictor of future performance (as discussed in the November, 2011, edition of this newsletter) and this is particularly the case when the future period contains a great number of calls \u2013 as it did on 2005-12-31, when there was negligible correlation between Current Yield and the subsequent year\u2019s performance. This empirical observation is well supported by common sense \u2013 Current Yield assumes that the instrument will exist to perpetuity, an assumption that is very difficult to support when so many instruments are trading so far above their call price.<\/p>\n
It is certainly now the case, particularly for Bank DeemedRetractibles, that issues are trading well above their call price. This means that details of the call schedules have become critically important to the valuation of these instruments \u2013 but these details are ignored in the Current Yield calculation.<\/p>\n
This disconnect between short-term preservation of rank by Current Yield and long term performance prediction means that sudden large changes in market levels are often accompanied by trading opportunities. Investors who may be in the habit of reviewing their preferred share portfolio quarterly, or even annually, should definitely be taking an extra look at their portfolio\u2019s composition when prices change substantially.<\/p><\/blockquote>\n
Look for the research link!<\/p>\n
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