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

Bonds_and_Preferred_SharesAfter spiking a bit at the end of March, the FTSE TMX Canada Universe Bond index has pulled back again. Since the beginning of the year, the index has declined 0.5 per cent. Meanwhile, corporate bonds have continued to outperform their government bond counterparts. The corporate index is down 0.2 per cent, while the government index is down 0.6 per cent.

As the global economy continues to grow, the major central banks are expected to increasingly adopt tighter monetary polices as the year progresses. This should push bond yields higher. Here at home, the Bank of Canada will probably move cautiously due to mounting global trade tensions and the state of the housing market.

Higher potential rates, of course, mean lower bond prices for the same terms. If you don’t follow a more passive, laddered approach to bond investing, and you’re concerned about near-term volatility, you might want to maintain a very short duration for your bond holdings.

What to do about preferred shares now

Investors don’t expect the Bank of Canada to raise its overnight interest rate until July. Maybe that’s why our floating-rate preferred shares have performed poorly in relation to our fixed-rate perpetual preferreds this past month. In fact, the floaters have mostly pulled back in price, while the fixed perpetuals made gains. So the question remains as to when and in which direction rates will move next, although we at the Money Reporter are fairly convinced as to the ‘direction’ part of the answer.

Since we think that rates are headed upward, we continue to prefer floating-rate preferred stock issues over straight fixed perpetual preferreds as a group right now. We expect that the floating nature of the dividend rate will help reduce the price sacrifice that non-floating issues will inevitably suffer if rates do go up. Still, we do recommend holding any fixed perpetuals you already have. And you may want to add to them selectively as their rates approach 5.50 per cent, as this is still a nice premium to bond yields, especially given the tax advantage preferreds have.

This is an edited version of an article that was originally published for subscribers in the April 20, 2018, 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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