Natixis Canada Blog

Month: February 2015

Pref Update: Weak Demand for TransCanada Issue

Dax Latham 032
Dax Letham, CFA

Yesterday, TransCanada Corp (TRP) issued a $250 million rate reset preferred share with a 2.96% reset spread on November 2020. While the reset spread looked reasonable, the current yield was well below what we believe is fair value. The 3.8% yield on this new issue was 0.3% to 0.5% below similar long dated TRP rate resets. This is probably why the deal was not well received by investors. According to our sources, the syndicate was not able to sell the entire $250MM deal yesterday, and institutional demand was very weak (only 1.2 million of the 10 million shares). Due to the low dividend yield, the NexGen Preferred share Fund did not participate in the deal.

This new issue also appeared to put added pressure on the rate reset market, which was down close to 1% yesterday. Low rate resets and energy-related preferreds were responsible for most of the under-performance, as many issues were down 2% to 4%.

Dax Letham

Portfolio Manager, J. Zechner Associates

The Game Changer

Jeff Herold
Jeff Herold, J. Zechner Associate, Lead Fixed Income Manager

The Canadian bond market enjoyed a very good month in January. Remarkable declines in yields resulted in substantial price gains, and total bond returns for the month were better than those of many years. The FTSE TMX Canada Universe Bond index earned 4.63% in the period, while the FTSE TMX Canada Long Term Bond index surged 8.17%.

The strength of the bond market was primarily due to a flight-to-safety bid as investors sought secure investments. The price of oil continued to plunge, falling from over US$53 to under US$45, and casting a sense of impending doom on the global economy. Concerns about anemic economic growth, possible deflation, and a breakup of the European Union prompted lower European yields that spilled over into North America. As well, a dramatic shift in policy by the Bank of Canada pushed Canadian bond yields lower and their prices higher. International buying of Canadian bonds appeared to be quite strong, notwithstanding a falling Canadian exchange rate, as negative yields in several countries made our yields look attractive by comparison.Read More…

Market Update – The Bank of Canada’s Surprise Rate Cut

Baker Gilmore PhotoDarren Ducharme & Harold Scheer- Baker Gilmore

Central Bank Transparency
Historically, the formulation of central bank policy was not transparent; in an effort to generate a bigger impact on capital markets, central bankers often looked to surprise market participants when implementing changes to policy.
Over the past 15 years, however, central banks have increased their
efforts to clearly communicate their actions to the public and markets; one of the main goals behind this heightened transparency was to protect central bank political independence. In the aftermath of the credit crisis, one of the new policy tools introduced in an effort to boost transparency was the concept of forward guidance, whereby central banks tried to guide the direction of markets by committing to maintain low or zero administered interest rates until certain economic or market objectives had been achieved.Read More…

Dividends: An important thing but not the only thing

Ziegler Photos

U.S. equity markets produced disappointing performance in January, with the S&P 500 Index losing 3.0%, the small-cap S&P 600 Index down 3.5% and the mid-cap S&P 400 Index down 1.1%.Value-oriented equity management approaches under-performed growth-tilted strategies in January, as investors sought out stocks with strong momentum and earnings growth against the weak equity market backdrop. The Russell 1000 Value Index decreased 4.0% in January, led lower by the cyclically sensitive Information Technology (-7.6%) and Financial (-6.3%) sectors, while the defensive Utilities  (+2.1%) and Healthcare (+0.8%) were the only two sectors to show positive returns for the month.

The initial estimate of fourth quarter U.S. GDP was released at the end of the January and was noticeably lower than the surprisingly strong third quarter.  The 2.6% annualized gain in fourth-quarter GDP was slightly below the 3.0% consensus forecast and looks somewhat lackluster following the third quarter’s robust 5.0% gain.  Read More…

January Correction May Yield Attractive Buying Opportunities

Jeff Herold
Jeff Herold, J. Zechner Associate, Lead Fixed Income Manager

The preferred share market corrected in January as certain sectors of it experienced sharply lower prices. The S&P/TSX Preferred Share Total Return index fell 4.58% in the month, while the S&P/TSX Laddered Preferred Share index fell 7.24%. In part, the weakness was expected because rate reset issues that have to reset their dividend rates in 2015 generally have low reset spreads. As a result, the new dividend rates were likely to be significantly lower than both the previous rates and current market levels. We had believed for several months that the prices of these issues had yet to reflect the lower future payouts, so the January correction was overdue.

A second factor behind the decline in preferred share prices in the month was the surprise Read More…

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