BoC rate cut prompts review of bonds and preferreds

 What to do about bonds

Canadian bonds have produced strong total returns so far this year. The FTSE Universe Bond Index, which covers over 1,300 Canadian bonds, has returned 3.5 per cent year to date. The FTSE Universe All-Government Bond Index (more than 400 issues) has returned 3.8 per cent over the same time, and FTSE Universe All-Corporate Bond Index has posted a 2.8-per cent gain.

Our own bond selections have reflected what the benchmarks have done. Our Government of Canada group showed price gains for 10 of 12 issues, our provincials for 14 of 15 issues, and our corporates for seven of 12 issues. All our strip bonds gained in price.

If you hold the 5.85, March 3, 2033, Ontario bond, we now recommend it be sold. It yields 2.7 per cent, an unattractive yield considering the risk you assume with a bond that matures in 18 years.

We recommend a fixed-income allocation of about 40 per cent for persons of average risk tolerance, with a 45/55 split between government and corporate issues.

What to do about preferred shares

Early in January, we recommended you give equal attention to floating and straight preferred shares in your portfolio. This recommendation was based on the assumption that interest rates would increase in 2015, which now seems less likely in view of the Bank of Canada’s decision to lower its overnight rate. Consequently, we now recommend you favor straight preferreds over floaters.

If interest rates ever go up, we might change this advice. However, for most of the last few years, we’ve been recommending straights over floaters, and it’s been the right way to go.

Also, note that we’ve included a new addition to our Recommended Preferred Shares. Partners Value Split joins the Preferred Split Shares we recommend. It replaces Faircourt Split Trust, which matured in Dec. 2014.

Meanwhile, a nearly three-per cent year-to-date decline in preferred share prices makes these securities appear relatively attractive now.

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