In its monthly review of bonds and preferred shares, the Money Reporter recommends two corporate bonds that would fit well in a five-year laddered GIC portfolio.
What to do about bonds now
Canadian bond total returns, which had declined by about 3.3 per cent from late June to late July, staged a recovery in August, gaining about 1.5 per cent. Since then, returns have settled back a bit and are up 1.7 per cent on a year-to-date basis. Government bonds have gained 1.4 per cent, while corporate issues have returned 2.5 per cent.
The recovery in bond markets partly reflects a slowdown in inflation in the US. Then too, geopolitical concerns have played a role, as North Korea’s nuclear ambitions have prompted investors to seek the safe haven of fixed-income securities. However, we still expect yields to rise slowly over the longer term as global economic growth picks up and central banks consider tighter monetary policies.
Two corporate bond issues stand out among our recommended bond list this issue. Cameco yields 2.82 per cent and matures in about two years. Fairfax Financial yields 3.25 per cent and matures in about five years. We feel both would fit well into a laddered GIC portfolio.
What to do about preferred shares now
As we go to press, the Bank of Canada has just announced it will raise the target on its overnight interest rate to 1.00 per cent from 0.75 per cent. However, we have no word on what the big banks have done with their prime rates. In July, the banks raised prime to 2.95 per cent from 2.70 per cent when the Bank of Canada raised the overnight rate to 0.75 per cent from 0.50 per cent.
Floating-rate preferred shares, which pay dividends based on the current prime rate, have been increasing their quarterly dividend payments to reflect the 2.95-per-cent rate, and will increase these payments even further, assuming a further rise in the prime rate.
Since our August 4 issue, three of our six floaters have already raised their quarterly payment. Nonetheless, on average, the six floaters have lost 1.2 per cent of their value since that time. In some cases, this has made their yields more attractive.
We favour our floating-rate preferreds over our straight fixed perpetuals at this time.
This is an edited version of an article that was originally published for subscribers in the September 15, 2017, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.
Money Reporter, MPL Communications Inc.
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