A brief post on how ridiculous it is to (sometimes) buy Strips through a broker (another fixed income rant).
Each morning (and at various times throughout the day), I check my broker's fixed income offerings for ideas. For the most part, there are none. I keep my search short in terms of duration, and I'm constantly comparing the 0-5 year results for both corporates and strips against short term GIC's of the same duration. i.e., why lend short at X and take risk, when I get the equivalent return via GIC's with no risk?
Here's a quick example of this morning's results in 0-5 year Strips:
This is utterly stupid. The bond desk is willing to make a market in Hydro Quebec strips for example, maturing 04/15/16 (6 months). They'll buy these at 1.43073 YTM, and they'll sell these at .37237 YTM.
The spread is 105 bps.
For comparison's sake, here are 1 year GIC's this morning:
I can buy a 1 year GIC at 1.65%, a full 128 bps above Hydro Quebec strips, with no risk.
I don't think anyone in their right mind would buy the Hydro Quebec strips (or at least I hope no one would).
What's the risk to the broker of holding an inventory of strips Provincial or Municipal strips maturing at par in less than a year? Probably nothing. Worst case, the odd lot strips go unsold and mature at par.