Preferreds

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Re: Preferreds

Post by pmj »

I'm also thinking about the new Minimum Rate Reset Preferred Shares, first seen at PrefBlog, and listed at the top of this page:
http://www.investingforme.com/data-room ... red-shares
Mostly trading above par, but there are few lower - eg ECN-* & EFN-*, prob others.
ISTR a comment in another thread that the big banks can't issue min rate resets? None listed above.
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Re: Preferreds

Post by AltaRed »

Maybe not. I have never kept track of the Prefs with floors....in which case my previous post above is in error, at least as it petains to bank prefs.
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Re: Preferreds

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Here it is - Barry Critchley:
Financial institutions aren’t allowed to offer a floor on their rate resets.
http://business.financialpost.com/inves ... fd2ecbc7eb
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Re: Preferreds

Post by marcharry »

Thank you for taking the time to explain. I guess I am talking about 'new' fixed reset prefs with the yield floors. I am not certain. I think it is issues like RY.PR.O

I had wondered the same thing about availablity - I will check on that. According to this site there seem to be trades crossing daily currently priced around $25.30 https://web.tmxmoney.com/quote.php?qm_symbol=RY.PR.O

Why would I be concerned if they are called? They will be part of an FI ladder for the 1-5 years portion. I would gladly take 5% with risk of call than a guaranteed 1.8%. If I were in a scenario where I required that yield for something (i.e. to pay my rent) - I guess it would be a risk.

Presumably they can be laddered as well - the "5 year" call timing is from date of issue. For instance with RY.PR.O The first call date is in roughly 3 years and others will have different call dates based on date of issue (+ 5years). I would gladly buy them at issue if I can find them as well.

I can see how, depending on the purchase price, one would need to calculate YTW so as not to be stung when the "security" is called at the stated price - the standard practice to calculate bond yield based on price. Is there a good online calculator to do this - is it basically a callable bond...or is pre-calculated somewhere reputable (i.e. TD Waterhouse)?
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Re: Preferreds

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I believe the RY.PR.O you are referring too is a straight perpetual with a coupon of 4.9%. It has no maturity or call date....called when it suits the issuer http://prefblog.com/?p=29883

Beware the difference between 5 year fixed resets, 5 year fixed resets with a floor, floating prefs, and perpetuals. www.prefinfo.com is a helpful resource.

Added: The market price of RY.PR.O will vary widely depending on where the bond yield curve goes. With increasing yields, this sucker could fall significantly....to provide the market yield necessary to attract buyers.
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Re: Preferreds

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Right. The light is slowly coming on :)
The call dates give the issuer the RIGHT BUT NOT THE OBLIGATION to call the security at the named price i.e. its a 'bond' that does not mature until 2045. As such the price will vary with the market to adjust the yield as appropriate. I generally do not trade bonds, I hold them to maturity - that would be a big problem here in a rising interest rate environment.

...but then the Yield To Worst Case Scenario (YTW) is hardly that with the evident risk on the 'principle"?
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Re: Preferreds

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YTW calculation on that perpetual if you got it from Prefblog is based on an assumed maturity date of 30 years from the date James provided the YTW in that link. That pref actually has no maturity date at all. If you were to look at James' calculations today, the assumed maturity date for that issue is now July 2047. 30 years is simply an assumption used for comparison of issues.

Added: Prefs are not easy to understand. A number of FWFers have been in and out of them, and some of us got taken out to the woodshed a few years ago on fixed reset issues when we all assumed the GOC5 bond yield could not possibly go down any more and had to start going back up by 2016 or so. We are still waiting for that GOC5 yield to be higher than when it was when we bought those issues in circa 2014 or so. Some of us subsequently did swaps to crystallize tax losses for other reasons, others left the space in 2016 when fixed resets rallied to recover the bulk of their losses, etc.

Myself.... well, I went into the Pref space too, but with about 1/3rd straight perpetuals and 2/3 fixed resets. My straight perpetuals are in the green but they will suffer when interest rates really begin to rise and I must consider whether I continue ot hold or not as pseudo-fixed income allocation. With my fixed resets, I've done swaps to capture tax losses for other uses AND for the most part, most of them have almost fully recovered. Most of my fixed resets are now with insurers that "may" be called someday if OSFI mandates that insurance companies must follow banks with NVCC compliant issues. That may, or may not, happen. James currrently assumes a 'call' date of Jan 31, 2025 for YTW purposes but that is purely an assumption for now. If it does happen in 2025 or 2030 or whatever, the insurers will call the non-compliant issues at $25.

Most people are better off in CPD, an ETF of a mix of pref types according to the index, or ZPR, an ETF of laddered maturities of fixed reset prefs only. Each will behave slightly differently depending on market sentiment on bond yield curves. The attractiveness of prefs has really been the tax advantaged income they spin off... a substitute for example to other 'high income' products that have their own issues and vulnerabilities. There is no free lunch.
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Re: Preferreds

Post by marcharry »

"No free lunch" was exactly the phrase that came to mind...followed by "if it looks too good to be true...". Clearly it is not a substitute for the real FI GIC ladder that is the "safety" part of my portfolio - it is more akin to an asset class somewhere between equity/FI. And since it is in a sheltered account there is less demand for tax advantages, of course the need for yield is ever-present. Thx again
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Re: Preferreds

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marcharry wrote: 07 Jul 2017 11:16 "No free lunch" was exactly the phrase that came to mind...followed by "if it looks too good to be true...". Clearly it is not a substitute for the real FI GIC ladder that is the "safety" part of my portfolio - it is more akin to an asset class somewhere between equity/FI. And since it is in a sheltered account there is less demand for tax advantages, of course the need for yield is ever-present. Thx again
No free lunch.That includes GICs. Five year rate GICs doesn't cover the taxes and inflation. With interest rates moving higher resets should be a decent investment. I use the BMO ETF[ ZPR] . I bought this last November and I am getting a solid capital gain and a nice 4% tax friendly dividend.
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Re: Preferreds

Post by AltaRed »

That is data mining. It's not all that relevant what your return has been since November. You SHOULD be getting a good return since early 2016 given the carnage previously. Try a 5 year return as a minimum.
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Re: Preferreds

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AltaRed wrote: 07 Jul 2017 15:58 That is data mining. It's not all that relevant what your return has been since November. You SHOULD be getting a good return since early 2016 given the carnage previously. Try a 5 year return as a minimum.
No it isn't data mining. It was a decision based on my analysis of the market and based on the thinking of Mr Hymas. It would be data mining if I hadn't made that purchase. If interest rates are going up it's a pretty solid investment. Risk is a four letter word in making investments. All one can do is to make your analysis and act on it. I figure if you are right 6 out of 10 times you are moving ahead. Sorry you are having a hard time with my comments. With the complexity of the various preferred shares 5 years might not be the way to play this market. It might have worked when there was preferred shares with a hard maturity dates.[ in those daysI had some of those and held them for 5 and 6 year periods] Buying into perpetual insurance preferred is believing that the regulator will force the insurance companies to buy out their preferred at $25. I am staying away from that 8 year buy and hold strategy. Resets with strong reset protection and a 5% current yield doesn't look all that risky.ZPR might not be the best here I bought it because I will be selling it in the fall and using it to pay for a cruise. . I am thinking of the new 5 year resets with a healthy reset margin on the gov't 5 year rate are the best for a person looking at a 5 year outlook. My taxable investments have been pretty well been used up so the need for this type of investments has diminished. Not interested in buying any preferred shares in my RRIF or TFSA.
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Re: Preferreds

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Thegipper wrote: 07 Jul 2017 17:32 No it isn't data mining. It was a decision based on my analysis of the market and based on the thinking of Mr Hymas. It would be data mining if I hadn't made that purchase.
I'd suggest the discussion with marcharry has been in a much broader context than a snapshot of your own recent investment decision. IOW, it is not helpful in understanding prefs to look at very short term performance. There may, or may not, be any additional cap gains in fixed resets because it is mostly dependent on where market sentiment is on GOC5 yield. Chances are there will be additional gains in *some* fixed resets (those resetting in the next few years) if investors believe GOC5 will continue to increase. Those at the long end of the 5 year reset period, e.g. having just reset summer of 2016, may likely suffer capital losses near term (if sold), if for no other reason than the next reset date feels like it is in the next millenium (2021 or so). Prefs are complicated animals.
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Re: Preferreds

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AltaRed wrote: 07 Jul 2017 17:50
Thegipper wrote: 07 Jul 2017 17:32 No it isn't data mining. It was a decision based on my analysis of the market and based on the thinking of Mr Hymas. It would be data mining if I hadn't made that purchase.
I'd suggest the discussion with marcharry has been in a much broader context than a snapshot of your own recent investment decision. IOW, it is not helpful in understanding prefs to look at very short term performance. There may, or may not, be any additional cap gains in fixed resets because it is mostly dependent on where market sentiment is on GOC5 yield. Chances are there will be additional gains in *some* fixed resets (those resetting in the next few years) if investors believe GOC5 will continue to increase. Those at the long end of the 5 year reset period, e.g. having just reset summer of 2016, may likely suffer capital losses near term (if sold), if for no other reason than the next reset date feels like it is in the next millenium (2021 or so). Prefs are complicated animals.
May-be I missed something. Was this topic restricted to a discussion on 5 year time frames?
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Re: Preferreds

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Thegipper wrote: 07 Jul 2017 17:55 May-be I missed something. Was this topic restricted to a discussion on 5 year time frames?
Nope. Pick 10 or 20 years CAGR if you wish. Maybe even 3 yrs works for some.
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Re: Preferreds

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AltaRed wrote: 07 Jul 2017 17:50Prefs are complicated animals.
Master of understatement. James Hymas makes them his life's work. More power to him! :thumbsup:
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Re: Preferreds

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A lot of us will agree that preferreds are a complicated game. Actually, a rigged game that is massively in favour of the issuer.
What can a novice and powerless investor do in such a setup? We are all hunting for yield and get tempted by the high four and low five percentage points offered by the preferreds.
At the same time, we get very worried by the potential loss in capital due to some unknown or unexpected change in market conditions(e.g. GOC5 falling precipitously in 2015/16). Or the possibility of getting locked in to issues for a very long time, essentially making the accounts illiquid. Other than completely exiting the segment, what else is someone supposed to do?

The answer is simple. Lower your expectations. Instead of high 4s and high 5s, aim for high 3s or low 4s. Here's how to do it:

1. Go only for issues with highest available credit. That is anything below Pfd 2(L) should be ignored.
2. Assume the absolute worst will happen and only check the yield to worst, that is yield based on the earliest call date.
3. Go for floating issues that have the widest spread. Minimum 300 bps. Why this criteria? This is because in all markets except the ones we just saw in the last 2 years or so, this is a huge premium for high quality issuers. In bond market, the same issuers pay no more than 100 to 200 bps over GOC. A spread of 300 bps or higher makes these issues very expensive for the issuer, especially considering that these issuers are of enormous size in the financial and insurance sectors.
4. If market conditions improve, the issue will very likely be called at the earliest date. You will enjoy your high 3s or low 4s in the meantime.
5. If market conditions don't improve, you are shielded by the high spread. Should BoC bring rates down to zero, you'll be shielded to a large extent by the wide spread. And your expectations were modest to begin with. You might have to wait a little while longer till the conditions improve.

This is a very defensive play designed to give you a relatively higher yield than GIC, but protecting you to a large extent from unexpected turns of the market. Could this approach have been used in the past, say circa 2010 to 2014. Possibly, but I doubt if there were very many solid issues available with wide spreads that we have today. So while the market for preferreds is still beaten by a number of metrics, this is a good chance to get something going if your objectives are to park money for a few years and earn a decent return.
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Re: Preferreds

Post by Hogwild »

TheGipper:

Just a little nitpick.
Just so no complete newbies get confused, I'm assuming you meant .80%, and not .08%. Don't know too many people who would go for that return.
:D

Thegipper wrote: 11 Jun 2017 17:09 I am surprised at how many people park significant amounts of cash in HISA in taxable accounts and getting .08% when they could be in a tax efficient preferred paying in the region of 5% with a solid spread protection on the reset date. Resets should be a solid defensive option if interest rates remain stable or on the riser. I much prefer to my chances with preferred shares over the alternate of HISAs or GICs.
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Re: Preferreds

Post by milton »

Rate reset holders rejoice now BoC 5yr is above inflation! And perpetual pref holders run to the hills!

Biggest mover in my rate resets was HSE.PR.A, up 2.26% Biggest loser in my perpetuals was BBD.PR.C, down 2.31%. Some of the lightly traded issues didn't even react, e.g. AX.PR.G didn't move on volume of 400 shares, guess it didn't get news of the rate hike yet.

How'd everyone make out? A little bit of excitement is always good...
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Re: Preferreds

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My view is this was already baked in. My two perps went up 0.25 and 0.32%. 4 resets went up 0.5-1% and one reset actually went down fractionally. Not complaining though... only have 1 reset that is materially underwater (-14%), an original ENB offering that will reset in 2020. I am keeping it for now (dividend) and to remind me how the bloom is tarnished off the ENB rose the last few years.
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Re: Preferreds

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Hogwild wrote: 09 Jul 2017 12:21 TheGipper:

Just a little nitpick.
Just so no complete newbies get confused, I'm assuming you meant .80%, and not .08%. Don't know too many people who would go for that return.
:D

Thegipper wrote: 11 Jun 2017 17:09 I am surprised at how many people park significant amounts of cash in HISA in taxable accounts and getting .08% when they could be in a tax efficient preferred paying in the region of 5% with a solid spread protection on the reset date. Resets should be a solid defensive option if interest rates remain stable or on the riser. I much prefer to my chances with preferred shares over the alternate of HISAs or GICs.
On the otherr handyou can buy Oaken 5 y GIC at 3.25% (CDIC insured) :)
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Re: Preferreds

Post by gibor »

Here's how to do it:
Just curious.. can you find prefs with those conditions (esp 1. and 3.) in current market? I mean the highest grade and 300+ spread?
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Re: Preferreds

Post by gibor »

For diversification purposes, I'm planning to buy US pref ETF. I found the biggest ones: PGX and PFF and PFXF (smaller, but rx-financials). All have nice yield and low beta. Both very liquid.
what are cons/pros of each of them?
In you opinion , which one better in current market conditions? (interest rates going up)
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Re: Preferreds

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gibor wrote: 19 Jul 2017 12:12
Hogwild wrote: 09 Jul 2017 12:21 TheGipper:

Just a little nitpick.
Just so no complete newbies get confused, I'm assuming you meant .80%, and not .08%. Don't know too many people who would go for that return.
:D

Thegipper wrote: 11 Jun 2017 17:09 I am surprised at how many people park significant amounts of cash in HISA in taxable accounts and getting .08% when they could be in a tax efficient preferred paying in the region of 5% with a solid spread protection on the reset date. Resets should be a solid defensive option if interest rates remain stable or on the riser. I much prefer to my chances with preferred shares over the alternate of HISAs or GICs.
On the otherr handyou can buy Oaken 5 y GIC at 3.25% (CDIC insured) :)
Last I saw was it was 3%. Fair enough comment. If you are in a taxable account the tax treatment is much different. A 5% preferred is equivalent to about 6.2% on a GIC. Secondly the GIC is locked in for 5 years. I normally think preferred shares as something suitable for a taxable account. I would not use them in a registered account.


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Re: Preferreds

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gibor wrote: 19 Jul 2017 12:19 For diversification purposes, I'm planning to buy US pref ETF. I found the biggest ones: PGX and PFF and PFXF (smaller, but rx-financials). All have nice yield and low beta. Both very liquid.
what are cons/pros of each of them?
In you opinion , which one better in current market conditions? (interest rates going up)
I don't know because I suspect few, if any, of us even consider US domiciled preferred ETFs. But you might look at http://www.investopedia.com/articles/et ... better.asp

There is no tax advantage for us as regards US Prefs and currency risk could wipe out any returns quite easily, especially with a climbing loonie. But then again, if an investor is into USD bonds, then I guess there is an advantage to US Prefs. Personally, I would never even think to look at them.
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Re: Preferreds

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On the other hand, "currency risk" may increase your returns :). imho, US will raise interest rates more agressive than Canada... loonie can be overvalued now.
Also, I'm planning to buy it into my RRSP, so there is no difference from tax perspective US pref or CDN pref. US prefs ETF yielding 5.6-5.9%, Canadian's CPD and ZPR 3.5-4%.
I hold for years US$ bonds like PCY, HYG, VCSH and they performed not too badfor me
Last edited by gibor on 19 Jul 2017 18:32, edited 1 time in total.
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