Canadian bonds and preferred shares: What to do now?

Every month the Money Reporter publishes a comprehensive list of the best bonds to invest in including 13 Canadian corporate bonds and  38  Canadian federal and provincial government bonds and 15 of  the best Canadian preferred shares─both straight and floating rate─that it recommends for the portfolios of income oriented investors.

What to do about bonds now

Government bonds continue to outperform corporate issues.

These past couple of weeks, the FTSE TMX Universe All Government Bond Index has declined 0.14 per cent. Meanwhile, the All Corporate Bond Index has dropped 0.23 per cent. Year to date the Government Index is up 2.55 per cent, while the Corporate Index has gained 1.84 per cent.

Credit spreads on corporate bonds, or the differences in yield between corporate and government bonds, have risen in recent months, partly reflecting the need for corporates to offer higher premiums due to liquidity concerns in the corporate bond market. This provides patient, long-term investors an opportunity to pick up corporates at higher yields.

Eventually we expect corporates to outperform governments. That’s because, assuming economic growth eventually picks up, credit spreads should come down, and that should translate into higher prices for corporates relative to government bonds. Tilt your bond portfolio slightly to corporates.

What to do about preferred shares now

Preferred shares have continued to perform miserably, losing 3.6 per cent of their value these past couple of weeks. That brings the year-do-date loss for the S&P/TSX Preferred Share Index to 26.8 per cent.

Much of this year’s loss is due to panic in the rate-reset preferred share market. With some of these issues now resetting at lower rates, many investors have indiscriminately sold their preferreds. Panic over rate-resets has also extended to other areas of the overall preferred share market. And it hasn’t helped that Brookfield Asset Management and Canadian Utilities recently introduced a new type of rate-reset that places a floor under the rate the preferred can be reset at. This has caused investors to demand higher yields from other preferred shares.

That said, preferred shares seem oversold to us, though declines may continue to occur in the near term. Patient investors who are willing to focus less on current price and more on the long-term income that preferreds produce may be well rewarded. 

 

Money Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846