On Thursday the S&P 500 was up 0.2% and Toronto was up 0.6%
Dollarama was down 5.3% to $77.37. That is down from a high of almost $94. I read that latest quarterly press release and the company continues to grow very strongly. But it was a very expensive stock and so it was vulnerable to a decline for that reason. It is still expensive at this price and is pricing in a lot of growth.
Rate reset preferred shares have been getting hammered again as the five year bank of Canada yield has been declining. Also Royal Bank and Bank of Nova Scotia issued new five year rate rest shares at 5.5% and these will reset in five years at the five year plus about 4.7%. That is far richer than many existing rate reset shares. Correspondingly the existing rate reset shares had to go down in price so that their yields could compete.
The CWB five year rate reset is at $17.10 yielding 6.4%. It resets in a bit less than 41 months from now at the five year rate plus 276 basis points. We would need the five year Bank of Canada rate to go back to about 1.50% or higher before this would ever get back to the $25 level. At the moment there seems to be no increase in sight and instead there is talk of further Bank of Canada rate decreases. Perhaps the picture will change if the FED finally raises rates next week. Things can change rapidly in the markets and are seldom predictable.
It is amazing that the same market place that attracts some entities to buy a five year Canada bond at 0.8% refuses to buy a five-year Royal bank rate reset preferred share unless the yield is 5.5%. It seems like there is not one pool of investors who choose between these two. Given a choice it would seem clear the 5.5% preferred share is highly likely to be the better investment. But there seems to be a pool of captive investors or a pool of money that will ONLY invest in government bonds and so will accept the ultra low rate of 0.8%. At the end of the day there is some small chance that the Royal Bank could run into huge financial difficulties. It is probably exceedingly unlikely but there are some pools of money that are mandated not to take ANY chances. Even at that it is surprising that there is not enough other investors who are willing to take some risks and who would have been willing to take the Royal Bank pref shares at some level well below 5.5%. Consider that a five-year bond issued by banks yield only about 2.1 to 2.3%. The pref share would seem to be only slightly riskier and yields a lot more at 5.5%.
In the absence of financial troubled at RBC it is hard to conceive of how there would be a risk of that pref share trading under $25 when it resets at the five-year plus 4.7%. Say the five-year bank of Canada rate falls to zero, then would our RBC pref share not be attractive at reset at 4.7%? Or do people think the five-year Bank of Canada yield will be minus 2% in five years or something like that?
As noted yesterday, markets do not always seem to be rational.