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Tennessee Valley Authority Message Board

  • foreverwhiteroses foreverwhiteroses Jun 23, 2009 11:41 AM Flag

    WAY Too High

    Guess there's nobody here, but can anybody explain why both TVC and TVE are trading at the levels they are? Both are priced and repriced (when they are) at a rate of approx 80 basis points off of the 30 year constant maturity Treasury. TVC now has a 4.726% payment rate and TVE 4.5%. BOTH are now at about $26 and par = $25. As I write, the 30 year Treas is at 4.37 yield. That should put TVC around 5.17 yield (4.37 + 80) or approx $23 but, at $26, it's approximate yield (using current yield as a simplificaiton) is 4.54. The comparison for TVE is even worse. Reinforcing the theory, TVA just priced their retail "Electonotes" due in 2024 at 4.88%. So why are TVE and TVC trading at premiums to par when they both should be well below par? Anybody have any ideas?

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    • Better re-read what you read on quantumonline about the put.... Yo udid what I did initially I think. The put is ONLY exercisable if the coupon rate is repriced DOWNWARD. So the put would be valueless in a climbing interest rate environment.

      I do agree that the comparative rate maybe be closer to Treasuries today than when originally issued, BUT, TVA just issued more Electronotes at 4 3/4%. Looking at the daily volume on these, these don't look like anymore of an institutional issue than Electronotes nowadays.... obviously some better liquidity, but still, these remain too high imho.

    • Hi. I just found out about these instruments from someone on another board and I did some research on Quantum Online. Here's what I think in response to your questions.

      Even though the interest payment on these bonds is set at the 30 yr CMT plus 80+ bps, they could still trade in line with the yield on Treasuries. The reason is that even though these are not guaranteed by the US govt, investors may treat them the same as Treasuries, thereby bidding up the price of them until their yield is nearly equal to the yield on Treasuries. The same thing happens with Fannie Mae and Freddie Mac debt -- there is no explicit govt guarantee, but everyone treats them as such. This would cause them to trade with just a slight yield difference, but not as much as when the interest rate resetting mechanism was set when the bonds were first issued. In other words, when these were first issued, the underwriters and TVA thought they would have to offer a spread of 80 bps to get investors to buy these. Now, as Treasuries have come down in yield, and as the US Govt has stepped in to back Fannie and Freddie and invest in the TARP banks and GM etc., etc., investors are searching for arbitrage opportunities to buy a US govt type instrument that has a slightly higher yield. Thus, the traditional yield spread of 80 bps gets narrowed.
      The other reason could be that they have a put option attached. This is an inbedded option that is worth something. It guarantees that the bond won't trade below $25 because otherwise it could be put back to the TVA at par.

    • I agree the price here is too high. Price maybe reflects naive folks seeking safety, ready liquidation ability without thinking about inflation risk and other instruments pay 1-2% more yield, like GEA.

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