Wednesday’s session saw the S&P 500 unchanged and Toronto down 0.6%.
The big news this week is that bond interest rates have been spiking higher. The 5 year government of Canada bond is now at 4.38%.
Check the graph here. Click to see the 1 month and 1 year and maximum years views.
We have turned the clock back 16 years! as interest rates have not been this high since 2007 which was before the Financial Crisis.
This is pretty epic. Mortgage rates are on the rise again. This is bad news for stock prices. Perpetual preferred shares should also be declining. This Summer looked like a good time to buy those but you should find even lower prices (meaning higher yields) now.
Rate reset preferred are sort of bi-polar on this. Higher rates mean higher resets and that’s especially good for rate resets that are resetting shortly. On the other hand higher rates mean higher market required yields and so a rate reset that won’t reset for four years might go down in price. On top of that logical action there is investor psychology which is mostly negative toward rate reset preferred shares since they have been poor performers over the years. The bottom line is we don’t know the future but when these shares are offering attractive returns it seems prudent to buy some now and/or to continue holding. These yields could look very attractive if and when interest rates finally reverse.
The Canadian Western Bank rate reset CWB.PR.B will reset on April 30 (Though the first dividend at the new rate would be close to 3 months after that). That share was up 3.4% to $18.48 today. CWB.PR.D is at $24.68 and likely can’t go higher than about $25.25 since it seems very likely to be redeemed at $25 on April 30 due to its very unusually high spread over the 5 year bond. It would be great if CWB would redeem CWB.PR.B but they need the equity and may not be able to replace it cheaper so we certainly can’t count on this being redeemed.
As for CWB shares, oil at $95 is great for the Alberta economy and their loans in general have been very solid so far including in Ontario and B.C. Bad loans are always a possibility but CWB seems well positioned. They may finally get a day in the sun (hopefully a year or two at least) after having significantly under performed the big banks for quite some years. They have not had the high ROEs of the big banks which have had certain scale advantages.