What to do about bonds and preferred shares now

2018 will be another good year for preferred shares. Despite the increases in interest rates so far, low yields still prevail, although some preferreds now offer more attractive yields. We continue to favour our floating rate preferred shares.

What to do about preferred shares now

BondsandPreferredSharesAs far as Canadian markets are concerned, preferred shares were a bright spot in 2017. As the year wound down, the S&P/TSX Preferred Share Index was sitting on a price return of 7.4 per cent, outperforming the 4.1-per-cent gain of the S&P/TSX Composite Index.

The rise in interest rates was a dominant theme in the preferred-share market in the second half of the year. Given that most of the market is made up of rate-reset issues that change their interest rates every five years according to the prevailing level of interest rates, these issues stand to benefit in a rising-rate environment. Similarly, our recommended floating-rate preferred issues respond to increases in the Bank of Canada’s overnight rate. This accounts for their strong share-price increases, as well as their dividend increases, in recent months.

We think 2018 will be another good year for preferreds. Despite the increases in interest rates so far, low yields still prevail. But some preferreds now offer attractive yields. We continue to favour our floaters.

What to do about bonds now

If you’re looking for a bright spot amid all the twists and turns in the 2017 bond markets, it’s that bonds seem to have delivered a decent return for 2017. Towards the end of the year, the FTSE TMX Universe Bond Index was up 2.94 per cent year to date. Government bonds lagged the index with a return of 2.64 per cent. Corporate bonds, however, have led, with a 3.74-per-cent return.

Yet these decent returns were not achieved without a fair amount of backing and filling. The Universe Bond Index, which started the year at about the 1010 level, dipped into the red a couple of times in the first few months of the year. As summer approached, the index shot up to 1050, only to fall back to the 1015 level in the autumn. Since then, it recovered to the 1040 level.

Though volatility should continue in 2018, we continue to believe interest rates will head higher over time. Our general recommendation is that you should limit the term to maturity on your bonds to about five years and build a laddered portfolio.

This is an edited version of an article that was originally published for subscribers in the December 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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