I’ve been reviewing the fixed income situation in Canada. Some observations:
1. The yield curve is still heavily inverted, and the inversion has gotten even wider over the past week. The half-year bond is at around 525bps and the 10 year is at 359bps as I write this. There is a general anticipation of the rise of the short-term interest rates stopping, but this anticipation has been present now for almost half a year. Time will tell.
2. There hasn’t been a new TSX debenture issue since Fiera Capital a couple months ago, and issuance this year has been very light. Previously you would typically see companies issue new debt and call existing debt with half a year to a year left of maturity, but now they are letting debt run to near-maturity – probably because the coupons they are paying today are less than what they can roll over for, coupled with everybody and their grandmothers waiting for rates to decrease!
3. Preferred share markets are very thin, but if you do not anticipate the 5yr government bond yield changing materially for a year, there are many high-credit names that are trading at 10% rate resets. There are too numerous to mention, but for example, pretty much all of TransCanada’s (TSX: TRP) are trading above 10% at the current 5-yr rate reset value. It becomes an interesting situation for an income investor whether they want to roll the dice with equity, get a 7.6% yield currently or to play the relatively safer preferred shares and clip about 300bps more out of it. There’s even one really trashy financial issuer that has a reset yield currently north of 15% which I’ve looked at, but I value my sanity over yield at the moment.
4. Risk-free cash continues to remain extremely competitive against much out there. The only way to rationalize more speculative equity investments out there is with implied growth or implied expectations of interest rates dropping. We are not going to get this interest rate drop as long as market participants are obviously stalling for it.
10% vs cash.u doesn’t sound too bad in current environment. I’m wondering if a simple CPD.t isn’t a decent option, if ones opinion is that interest rates have nearly peaked for the next half decade, since its much simpler to trade and spread across multiple companies. Any thoughts on a general basket of these vs trying to get into only a couple companies?
Probably the same argument applies with buying the TSX 60 index instead of picking specific equities – you can probably add tens (if not a hundred or so) basis points of value by just quickly looking at which series of preferred shares are ‘cheap’ instead of buying the index flat-out.