RE:RE:RE:RE:RE:RE:RE:RE:RE:RE:RE:NCIB - February ActivityGood morning.
My two cents on floaters:
Everybody hates them.
They should be a great store of value because they don't carry term interest rate risk. (Yes, one can quibble about basis risk for the ones tied to prime instead of t-bills, but this is small potatoes and is positive in a lot of rate scenarios.) The charts show a different story though -- they are stupidly volatile. So, the core benefit of buying floaters is MIA. And for those looking for yield, they should pay less than fixed payers over the long term. So if everyone hates them, should I too, even when they're in the discount bin? Dunno yet.
As I said before, the high-grade floaters (straight, no conversion rights, not BPO) are trading at around a 50% discount. Poster child for strange pricing is PWF.PR.A, which is one of the safest credit bets in the whole pref share market: Pfd-2h, cumulative, and not NVCC.
Before the 2008 financial crisis, these puppies traded around, and even through, par. Down to $10 (!) in 2008, tested that level in 2016 (the China wobble), and sported a spicy $8-handle when covid was winning in 2020. 2013 is the last time they traded at par, and the last trade in the $20s was in 2018. I guess the lesson here is to hide some cash under a rock for the next crisis!
The massive selloffs of these prefs in previous bouts of global de-leveraging have permanently broken the idea that things can be seen as somewhat-riskier tax-advantaged money market analogues. I can't make sense of how far they drop, or why they're so cheap now when we're not (?) on the precipice of crisis, but here we are. I need to do a bunch more work to build some more buying conviction.
On the BPOs, I think they have room to run as a play on improving prospects and because they should be dragged up by fixed reset prices. It is not clear to me whether BN is not buying these because of illiquidity, because they expect the floater to be dragged up anyway, or because it jibes with their call for 200bps of rate relief. Does it make sense to take 15% here versus 10% on the high-grade floaters? My palms are getting sweaty.
I have a lot to think more about!
Regards,
Sonoffergus