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 December it recommended 38 government bonds, 13 corporate bonds and 15 preferred shares to buy now.

What to do about bonds now

Some people are calling for the imminent demise of the 30-year-old bond bull market. That’s because bond prices have continued to fall from the highs they set in early September and late October. In fact, the sell-off has quickened in the wake of Donald Trump’s election victory in early November. Mr. Trump’s polices are seen as inflationary since he has promised tax cuts and US$1 trillion in infrastructure spending.

Consequently, the FTSE TMX Universe Bond Index declined 0.4 per cent over the past month. The year-to-date gain now sits at 1.8 per cent, down from a gain of more than four per cent two months ago.

Recent bond-market action is quite remarkable, given that Mr. Trump’s spending plans may not make much progress through this Republican Congress. Then too, it’s not apparent what policies the new president will actually pursue.

Consequently, bonds could very well stage a rebound in the near term. Be sure to ladder your bond portfolio and keep terms to maturity short.

What to do about preferred shares now

In addition to accelerating the recent decline in bond prices, the Trump victory has also had implications for the preferred-share market. Mr. Trump’s so-called reflationary policies have been good for floating-rate preferreds but not fixed perpetuals.

This past month, our floaters have enjoyed an average price gain of 1.5 per cent. By contrast, our three straight fixed perpetuals have declined an average 5.7 per cent.

Consequently, the yield spread between these two types of preferreds has increased to 136 basis points, up from 95 basis points in our July 8 issue.

Given our skepticism over the extent to which Mr. Trump’s policies will be truly reflationary, we are not ready to change our advice on preferred shares quite yet. We continue to recommend an overweight in straight fixed perpetuals relative to floating-rate preferreds at this time.

But do hold some floaters as the interest-rate spread is still not as attractive as it’s been in years past.

 

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