Readers will remember that when the recent new issues were announced, I liked both of them: the BNS 5.25% was worth $25.93 according to the prior day’s closing prices, although by the time the BMO 5.25% was announced both issues were worth more like $25.33.
Which was still good enough to buy!
Following the debacle of Friday September 28, in which the market just kept on falling, both issues are now fairly valued below their issue price: fair value is about 24.88 to 24.90.
Something like this leads me to suspect that there just isn’t too much opportunistic money on the sidelines; that while the new issues were recognized as attractive, all the money required to buy them has come out of other preferred issues, rather than from other asset classes.
This is a funny market. 5.25% dividends, multiplied by an equivalency factor of 1.4 implies that interest of 7.35% must be received to provide the same after-tax income. There are unique risks in the preferred share market, of course. Investors must be aware of these risks and ensure they’re not overly exposed to any of them (or to any other single risk!) … but 7.35%? From a major bank? We haven’t seen that kind of interest rate lately.
Update, 2007-10-2: As of the close today, fair value for both issues is within a few pennies of $24.85.
Update, 2007-10-4: As of the close today, fair value is $24.72 for the BMO issue, $24.74 for BNS.
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