Best bonds and preferred shares to buy now

Every month the Money Reporter, the newsletter for investors whose interest is more interest, publishes its list of recommended bonds and preferred shares. In October it recommended 38 government bonds, 13 corporate bonds and 15 preferred shares to buy now.

What to do about bonds now

Year-to-date returns for Canadian bonds remain strong, with the FTSE TMX Universe Bond Index up 4.1 per cent. Corporate bonds have continued to outperform, with a return of 4.7 per cent versus a 3.8-per-cent gain for the Universe All Government Bond Index.

But after reaching a high around the 1050 level in late September and early October, the Universe Bond Index has since retreated to about 1035. So far in October, the index is down 1.2 per cent, with governments leading the retreat — down 1.3 per cent.

Given the likelihood the U.S. Federal Reserve will raise its overnight rate in the months to come, we expect Canadian government bond yields to gradually rise over the next year. Corporate bond prices should hold up relatively well, assuming economic growth rebounds over the balance of the year.

As for the bond section of a balanced portfolio, keep a 37-per-cent weighting overall but split the allocation 55 per cent corporates bonds and 45 per cent in government issues.

What to do about preferred shares now

Preferred prices are broadly lower since our last preferred update in September, reflecting what has also happened in the bond market. Our floating rate preferreds, however, have risen an average of 1.1 per cent, while our straight fixed preferreds have declined 1.2 per cent, and our fixed floaters are down just 0.5 per cent.

Meanwhile, our preferred securities selections are down even less — 0.4 per cent.

Within your preferred holdings, we continue to recommend you overweight straight fixed preferreds relative to floating-rate issues. The rationale for the recommendation is that interest rates are low and the Bank of Canada will likely not raise its overnight rate before the end of 2017. That said, however, the relative value of our straight fixed preferreds is less compelling than in recent years, with the spread over our floaters now at just 100 basis points. So be sure to hold some floaters in your portfolio too.

 

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