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. We currently recommend a 50-50 split between corporate and government bonds in your bond portfolio and an over-weighting of straight perpetual preferreds to floating rate preferred shares.

What to do about bonds now

BondsandPreferredSharesCanadian bond prices have generally continued to recover since our April 21 issue. The year-to-date performance of the FTSE TMX Canadian Universe Bond Index, therefore, sits at 2.4 per cent. Over this period, corporate bonds have outperformed government bonds 3.2 per cent to 2.1 per cent.

Much of the rally is due to developments in the U.S., where weaker-than-expected economic data has weighed on confidence about the economy. Confidence has also been negatively impacted by the confusing performance of the Trump administration and disagreement between Republicans over key policies such as health care.

We still feel the longer-term trend is toward higher interest rates, so focus on short- to medium-term bonds. Also, the yield spread between corporates and governments has narrowed due to the outperformance of corporates. We, therefore, now recommend a 50/50 split between corporates and governments in your bond portfolio.

What to do about preferred shares now

Right now, we advise investors who want to hold a balanced portfolio to allocate about 40 per cent of their overall portfolio to fixed-income securities. As preferred shares are regarded as one type of fixed-income security, how much of that 40 per cent you make up of preferred shares in your own portfolio will, in part, depend on your personal tax situation.

But not withstanding your tax situation, and within that preferreds-versus-overall-fixed-income allocation, we continue to recommend you overweight straight perpetual preferreds relative to floating-rate preferreds. While Canadian interest rates continue to hover near all-time lows right now, we also expect them to be stable for several more quarters at least, and so the extra protection offered by floaters, at a cost in their yields, is less compelling.

Since our last update in our April 21 issue, all six of our floating-rate selections and two of our straight perpetuals showed price losses. We regard such weakness as an opportunity to buy these attractive securities at lower prices.

This is an edited version of an article that was originally published for subscribers in the June 2, 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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