{"id":761,"date":"2007-04-16T13:25:57","date_gmt":"2007-04-16T17:25:57","guid":{"rendered":"http:\/\/www.prefblog.com\/?p=761"},"modified":"2007-04-16T13:25:57","modified_gmt":"2007-04-16T17:25:57","slug":"synthetic-floating-rate-preferreds-better-than-bce","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=761","title":{"rendered":"Synthetic Floating Rate Preferreds : Better than BCE?"},"content":{"rendered":"

Readers will have noticed that the market’s extreme dependence upon a single issuer<\/a> as a source of Floating Rate issues. This dependence has even led to the closing of a major fund to new investment<\/a>.<\/p>\n

So: this is where financial engineering comes in. There is very little need to actually have floating rate issues … one can have a portfolio of perpetuals and swap the income stream into floating rate, via Interest Rate Swaps<\/a>. Interest rate swaps are a huge market, big enough that the Chicago Board of Trade has designed a thirty-year swap contract<\/a> to complement its wildly successful 10-year contract<\/a>.<\/p>\n

Swaps in Canada are traded Over-the-Counter by the bigger banks. Essentially, one party agrees to pay a fixed rate for a definite term – this fixed rate will be very closely related to the fixed rate the bank pays on its direct obligations of similar term. In return, the counterparty agrees to pay the three-month Bankers’ Acceptance rate, reset periodically, for the same term. Obligations are netted, to minimize credit risk as far as possible.<\/p>\n

Therefore, there is no real need to rely on BCE for floating rate preferreds! You can buy a portfolio of bank-issued perpetuals and swap the income stream into\u00a0something\u00a0based on the\u00a0BA rate.<\/p>\n

It’s not a perfect hedge. There’s basis risk (bank prefs might not trade the same way as bank bonds, just for starters!), there’s tax risk (if short rates go to 25% then sure, you’ve got a pre-tax hedge, but not a post-tax one!) and there’s term risk (however much I may assume it in the programming, thirty years is not equal to infinity), to name but three.<\/p>\n

On the other hand I, for one, would\u00a0much rather have a bank-floater-equivalent than a BCE floater (all else being equal), so a few risks are acceptable, as long as they are quantified and understood.<\/p>\n

I’ve uploaded a more detailed proposal<\/a>. Does anyone have, say, $50-million in perps they want to convert to floaters?\n<\/p>\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

Readers will have noticed that the market’s extreme dependence upon a single issuer as a source of Floating Rate issues. This dependence has even led to the closing of a major fund to new investment. …<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[16],"tags":[],"class_list":["post-761","post","type-post","status-publish","format-standard","hentry","category-miscellaneous-news"],"_links":{"self":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/761","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=761"}],"version-history":[{"count":0,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/761\/revisions"}],"wp:attachment":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=761"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=761"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=761"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}