August 12, 2019

Monday was a negative day in the markets with the S&P 500 down 1.2% and Toronto down 0.6%.

Rate reset preferred shares were mostly particularly hard hit. This was due to the plunge in the five year government of Canada bond yield to 1.20%. It had started this year around 2.0% and had been as high as 2.5% in the Fall of 2018.

For example ENB.PF.A fell to $14.73. It will reset on December 1 at the Canada five year yield plus 266 basis points. If the Canada bond yield is 1.20% that would mean a reset yield of just 3.86%. But that would be 3.86% of $25 or 96.5 cents. That would make for a yield of 6.55% on the $14.73 price which is actually a very good yield in a world of 1.2% five year bonds. If the five year bond falls all the way to 0.50% on December 1 then this pref would reset to pay just 79 cents per year or 5.36% on the current price. That’s also not a bad yield.

ENB.PF.A has been a terrible investment over its life based on its market price decline. Investors, many times bitten, are now many times shy.

Various rate reset preferred shares have to be looked at on their own merits. Some have far higher reset spreads than this Enbridge pref. Newer issues and those that have recently reset have close to five years before they will reset again.

At the moment there are short term high interest accounts that pay 1.6% to 3.0% or more. These have no risk of a market decline and may be more attractive than some of the rate reset shares. But given the lower bond yields, I would expect the rates paid on such “high interest” accounts to head lower, perhaps much lower, very shortly.

Very low and even sometimes negative yields on government bonds are indicative of serious problems in the global financial system.

On another topic, CanFor is being taken private at a premium of about 70% to the recent stock price. This illustrates that stocks can trade quite a bit lower than the fair value that would be paid to acquire the entire company.