On Tuesday, markets were little changed as the S&P 500 was up fractionally and Toronto was down 0.1%.
Toll Brothers was up 1.9%. Constellation Software was down 2.3%.
Canadian Western Bank announced that its rate reset preferred share which reset this month will remain a fixed reset shares. Holders had the option to convert to a floating rate option but only if a minimum of 500,000 shares wanted to convert. That did not happen. Its hard to say if that was due to apathy or a real preference to stick with the fixed rate.
The 3 month T-Bill is currently very similar to the 5 year Canada bond yield. That would mean that the floating rate shares would have started out paying just around precisely the same rate as the five year fixed reset. In this circumstance the floating rate option might have been the better option. Certainly it was if you expect rates to rise over the next five years. But for whatever reasons few people chose the floating option – possibly simply because the default option was to stay fixed for another five years.
These shares will now pay 4.301% of $25 annually. The yield at their current price of $19.21 is 5.6%. When these shares were issued in 2014 the market deemed them to be worth $25 despite paying only 4.4%. This was with the five year Canada bond yielding 1.58% which is basically the same as today. But today the market demands a significantly higher yield of 5.6%. In part that may be due to the fact that very short term accounts now yield closer to 2% whereas they were closer to 0% in 2014. Or it may be due to the poor experience with rate reset shares that has investors demanding a bigger risk premium. In 2014, some investors thought of rate resets as a sort of substitute for cash but with better interest. But resets fell in price and investors found out that they were not a substitute for cash. Also in 2014 investors probably thought there was virtually no chance that the five year Canada government bond rate would fall as it was already so low at 1.58%. But it did fall to near a shockingly low 0.5% at one point. And so today investors know there is a chance rates could fall even if they are expected to rise.