Yields Spreads – (Updated Mar-19-2012)

The following table estimates the average yield spread between the 10 yr Gov. of Canada bond as of Dec-2004 compared to Feb-2012 for low, medium and high risk ratings. Gov. of Canada 10 year bond yields - Dec 2004: 4.3%, Feb 3, 2012: 1.94%

For comparison the yields spreads as estimated in Dec-04 are retained. The new estimates are located on the line just below to highlight those sectors for which we have changed the yield spreads, and those that have not changed. The ratings are based on 149 names in total that were taken from our Weekly Updates Price Change Listing. The yields on these were analyzed to estimate the low, medium and high risk yield spreads. This was exactly the same method we used in December-2004 to establish the yield spreads.

Beginning with the REITs the upper band for the Low Risk category has been increased from 2.5% to 3.5% and this have carried through to the Medium and High Risk categories for the REITs. When comparing the yield spreads now to December 2004, the REITs yield spreads are still approximately 1% wider. If Mr. Bernanke is earnest about interest rates staying low for at least several more years there is room for further price appreciation in the REITs.

The Pipelines-Midstream group the yield spread is still approximately 0.5% wider for the low risk, with no change to the medium risk rating. There are no pipelines or midstream in the high risk category. The pipeline and midstream group have been excellent performers, with yields spreads staying almost the same during the past seven years. Yields in this group have tracked the changes in the 10 year government bond yields. The result has been rising valuations and until central bankers change their guidance, we expect pull backs are price buying opportunities in what is still a longer term uptrend.

For the high yield names in the Business category the yields spreads have not changed. The one change we did make to the Business category was to separate out the Food Services and Financial Services categories. For these two categories there were no comparables in December 2004. Food services have 12 constituents and Financial Services has 10. One of the leading names in the Food Services group has been A&W Revenue Royalties Income Fund(AW.UN) who will report Q4 and 2011 earnings tomorrow.

The last three categories are the Utilities, Oil and Gas Producers and Energy Services group. The yield spreads for the Utilities have not changed since Dec-2004, having almost exactly tracked the reduction in the 10 year bond yields. The yields spreads for the oil and natural gas producers have compressed. This means investors are paying more for a given amount of yield from this group. This is due to better performance of several factors including higher oil prices and better than expected results when it comes to finding new reserves. These have been offset by low natural gas prices. The narrower yield spreads for this group indicates the yield they pay is priced more expensively now than before either the SIFT tax or the global financial crisis. The final category is energy services and all that is left are ones that are priced at low risk levels. This was a sector that was growing extremely rapidly with new trust conversions prior to the SIFT tax legislation. Earnings for the Energy Service Group are more volatile plus there were names that converted and never should have. There were also good names and in either case many were acquired. This has greatly reduced the number of players in this sector and only the low risk ones remain.