Our Canadian Western Bank rate reset preferred report is updated and rated (higher) Buy at $16.61. These shares yield an attractive 6.6%. But at the reset date in three years time if the five year government of Canada yield remains at about 0.70% then these will reset down to a yield of 5.2% – which still seems attractive though it is lower than the 6.25% yield at which CWB just issued some new rate reset shares.
The new preferred shares which CWB just issued and which have not yet started trading yield 6.25% and would reset to 6.17% if the government of Canada five year yield remains at 0.70%.
Both of these issues seem attractive. If the five year rate increases substantially before the reset then the existing shares at $16.61 could increase substantially towards $25. The new shares might increase somewhat but likely not very much given that the bank would likely buy them back in five years at $25 if they were otherwise worth much more than $25.
If you believe interest rates will not rise then the newer issue would be more attractive. If you believe interest rates will rise then the existing issue is likely more attractive. If you believe that we will see even lower interest rates, even negative rates, then you should likely avoid rate reset shares.
A lot of investors were badly burned on rate reset shares as the five year government rate fell substantially in the past 18 months. As a result, these rate reset shares may now be trading at higher yields than they really should be in order to attract investors who are sort of “once bitten, twice shy”. If that is the case, braver investors can take advantage of the higher yields. But the possibility remains that they too will be bitten.