"What I don't get is that they are chasing a floater which yields a bit over 4%, rather than a fixed rate from the same issuer yielding over 7% at roughly the same share price (AEB vs. AEF, e.g.). "
First you make a valid point. I have also wondered what the attraction is. I would tell you most issues that I have explored are liquidity issues. Both getting in and out of. I also think the total rate of return is pretty attractive if you think floaters are going to get called, but if you try to buy 10,000 shares you drive out any potential profit. If you thought BOTH issues were to be called I could see shorting the 7.25 to get the floater, but thats just plain speculation. Suffice it to say I'm a big beleiver that the PFD market is not the most effiecent place with these illiquid issues and I do trade between them when it seems to make sense. Take a look at BML prH and G. seems to me for the forseeable future they will pay the same. So if I'm going to make a call, I'd say the market is saying that rates will be down for the forseeable future, these floor based PFD's paying 3 to 4% will be replaced, or if not, wont pay less and eventually go pact to par for a good TRR.
"Perhaps that short-term rates will rise sooner, rather than later, despite the Fed"
I don't buy this one. when rates really start to rise the lag time and lack of liquity isnt going to be pleasent. You think rates are going up (well it depends why you think rates are rising) I'd do 30, 60 90 paper and stay away from most Pfds for a time. lets face it .875 over libor for junk paper isnt all that attractive.
"Or that the economy is stronger than believed (if so, participation loan funds should do well). "
yes I think so. Again its the lag and liquidity that will make these very interesting at some point.
"The thing is that they're now hitting the floor. I guess my real dilemna is whether to sell my floaters. With AEB, e.g., my cap gain is about 7 years worth of dividends (in a taxable account). Others are similar, though not quite that extreme"
Nice, this is what I'm doing. take a historical spread between the issues your looking at (I compare the two charts with "spead " line. Determine where they usually trade (generally discount 2008 and 2009). Dont forget to look at x-dates. You will probably not only see pretty quickly what is over valued and under valued, but that they also CHANGE positions. Only Mcsweet ever showed much interest, but decided it was more trouble then its worth for him.
Finally, if that all is to much, here is my answer. I looked at both your positions with my charts and would sell the floater and buy the fixed (assuming you dont think its getting called). Obviously you get what you pay for as its IMHO only. |
