I wrote earlierabout dividend yields on perpetual preferred shares (no fixed maturities) being extremely high relative to corporate yields. The implication was that preferred shares appeared to be good value.
Yields on perpetuals were elevated because preferred-share investors (mostly retail) were selling due to fears of higher inflation and interest rates, while yields on corporate bonds were declining because corporate-bond investors (mostly institutional) were buying as signs of economic recovery increased and suggested insolvency risk was abating.
Harry Levant, editor of IncomeResearch.ca, writes in to offer a somewhat different perspective.
I receive considerable feedback from my client base, and the concern with the perpetuals is the lack of maturity date . they only behave identical to a bond when interest rates are falling. When rates go up the factors affecting value become more of a mixed bag. [That is,] when the lack of a maturity date is combined with valid concern that governments will be unable to control spending this is causing interest rates to climb, and keeping the prices down.
The perpetuals have no exit if interest rates rise for an extended period, (the prices will grind down) and this is a big concern because governments are providing the biggest bailout ever in the history of markets, and no one knows how it will all turn out.
So, if I interpret correctly, fears of inflation and higher dont weigh as heavily on buyers of corporate bonds because they have fixed maturities and can be put into bond ladders, which reduces inflation and interest rate risks. Perpetuals dont have fixed maturities and so cant be arranged into ladders, leaving them more exposed to inflation and interest rate risks.
As a solution, Levant recommends having a balance between perpetual preferreds and rate-reset preferreds (dividends reset when interest rates change). Our approach is to split the risk by owning some of each when the prices are right, he says.
Blogs & Comment
Another perspective on preferred shares
By Larry MacDonald
I wrote earlierabout dividend yields on perpetual preferred shares (no fixed maturities) being extremely high relative to corporate yields. The implication was that preferred shares appeared to be good value.
Yields on perpetuals were elevated because preferred-share investors (mostly retail) were selling due to fears of higher inflation and interest rates, while yields on corporate bonds were declining because corporate-bond investors (mostly institutional) were buying as signs of economic recovery increased and suggested insolvency risk was abating.
Harry Levant, editor of IncomeResearch.ca, writes in to offer a somewhat different perspective.
I receive considerable feedback from my client base, and the concern with the perpetuals is the lack of maturity date . they only behave identical to a bond when interest rates are falling. When rates go up the factors affecting value become more of a mixed bag. [That is,] when the lack of a maturity date is combined with valid concern that governments will be unable to control spending this is causing interest rates to climb, and keeping the prices down.
The perpetuals have no exit if interest rates rise for an extended period, (the prices will grind down) and this is a big concern because governments are providing the biggest bailout ever in the history of markets, and no one knows how it will all turn out.
So, if I interpret correctly, fears of inflation and higher dont weigh as heavily on buyers of corporate bonds because they have fixed maturities and can be put into bond ladders, which reduces inflation and interest rate risks. Perpetuals dont have fixed maturities and so cant be arranged into ladders, leaving them more exposed to inflation and interest rate risks.
As a solution, Levant recommends having a balance between perpetual preferreds and rate-reset preferreds (dividends reset when interest rates change). Our approach is to split the risk by owning some of each when the prices are right, he says.