RE:RE:RE:Dividends are in the account.Hi Pierre.
Congrats on your T series call. What a win! I very much like your theory that it takes a while for Mr. Market to realize that dividends have reset and, since pref prices are overwhelmingly driven by retail, series T sure sticks out in a broker's data dump as a "bird in hand." 11%+ for 5 years does wonders for a payback ratio.
The BPO prefs, and prefs in general, are fascinating to me.
Investors are definitely expressing rate views in prefs. Perpetual YTW is way inside of fixed reset YTW, so the market is betting hard that long rates are coming down. I think bond pros are using them as an alternative play on long-term rates. Per prefblog, perpetual YTW is 6.57% versus 6.89% for fixed resets. Since duration for a straight perp is 1/yield, duration is 15.22, meaning (roughly) a 100bp decrease in yield gives a price bump of 15.22% on par! That's lower than duration on a 30-year Canada, but with a bond investors miss out on both tax and credit effects. I don't fully understand it, but net net, pref investors would rather bet on rates going lower through perps than take the safer reset route.
My positions have reflected "higher for longer." I have seriously overweighted 2024 resets and have booked big gains on blue-chip issuers. I'm not waiting around to find out if my rate call ends up right on these positions because the upside isn't worth the risk IMO. I'm holding on to my 2024 resets for lesser credits though, as I think they have room to run as the economic outlook improves (which, of course, is tied to rates so could be double-right or double-wrong).
I'm holding a bunch of series A for this reason, and they have had a big run as you know, to the point where they don't stand out as a great value vs. the rest of the BPO offerings. If rates stay steady until the end of November (when the rate gets reset), I'll be a happy camper. And if the market continues to want to bet on rates holding on in the near term (and BN continuing to buy through the NCIB), I'm here for it.
That said, the BPOs have an interesting internal hedge characteristic that gives my additional comfort: if long-term rates come down, the value of future dividends comes down BUT BPO's credit risk probably comes down too, so hopefully the pain will be largely mitigated.
If rates come way down, we have the benefit of very high reset spreads, which gives additional comfort. If the series A resets at 0% GoC, as an edge example, they would yield 5.66% at current price, which at 130% for tax effect is 7.358% over risk-free! If rates go up, the entire complex should benefit to a point (varying based on reset), until they get to a level that BPO's creditworthiness comes into the spotlight. The As will of course outperform the Ts in this scenario.
As rodbhar points out, no one knows where rates are going, so it's best to spread the risk around. Everyone at least leans to a rate view though, what fun is a 20% x 5 ladder lol?
Anyway, lots to think about! I hope this makes sense, as Carena says.
Best,
Sonoffergus