What to do about bonds and preferred shares now

Every month the Money Reporter, the newsletter for investors whose interest is more interest, publishes its list of recommended bonds and preferred shares.

What to do about bonds now

Canadian bond prices have been in recovery mode since mid-March. Since then, the FTSE TMX Canada Universe Bond Index has risen about two per cent. Consequently, the year-to-date gain for the index has improved from 0.35 per cent when we last reported in this space two issues ago to 2.0 per cent now. Corporate bonds have outperformed this year, but have lagged government bonds so far in April.

Some of the factors that have supported higher bond prices are weaker-than-expected economic data in the U.S. in March, and the failure of the Republicans to repeal and replace Obamacare. This has cast doubt on President Trump’s ability to secure passage of other legislation designed to invigorate economic growth and, consequently, inflation.

None of this changes our view that the longer-term trend for interest rates will be up. Under these circumstances, you can minimize the risk of higher interest rates by laddering your fixed-income portfolio from one to five years. If liquidity is not so important to you, include GICs in your bond portfolio.

What to do about preferred shares now

Preferred shares continue to dominate the action in fixed-income markets. So far in April, the S&P/TSX Preferred Share Index is up 1.3 per cent, and on a year-to-date basis it’s up 7.6 per cent.

Since our last update on preferred shares two issues ago, our floating-rate preferreds have gained an average 1.7 per cent, while our three straight perpetual preferreds have risen 3.0 per cent. There’s reason to find some attraction in both these types of issues right now.

The Bank of Canada recently said the Canadian economy’s output gap will close by early 2018, earlier than its previous forecast of mid-2018. This moves forward the possibility of a hike in the bank’s key overnight interest rate. In response, short-term bond yields could rise, causing the prices of our floating preferreds to strengthen.

Perpetual preferreds, on the other hand, continue to hold appeal for their absolute returns and their declining supply. Recently, two big banks have redeemed some of their perpetual issues.

This is an edited version of an article that was originally published for subscribers in the April 21, 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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