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.

bonds_and_preferred_sharesWhat to do about bonds now

On July 11, the Bank of Canada chose to raise its target overnight interest rate yet again, bringing it to 1.50 per cent from 1.25 per cent. This was the fourth 25-basis-point increase over the past 12 months. The rate is expected to continue gradually moving up in the next couple of years, though forecasters are divided over whether there will be a further hike this year.

Meanwhile, Canadian bond yields have begun to creep back up again. The FTSE TMX Canada Universe Bond Index’s yield began the year at about 2.45 per cent, and then moved up above 2.85 per cent by the second quarter. It then fell back to below 2.60 per cent by the end of the quarter. And since the beginning of the third quarter, it has climbed above 2.70 per cent. The total return for the index since the beginning of the year is 0.4 per cent.

Once again, we recommend you shorten the average term to maturity of your bond holdings, and more importantly their duration, by trading into higher coupon shorter maturities such as the Fairfax Financial 5.84s of Oct. 14, 2022.

What to do about preferred shares now

In mid-2017, we changed our advice to a preference for floating-rate preferreds as opposed to straight, fixed-perpetual preferreds. This was in anticipation of the Bank of Canada continuing the rate-increasing cycle that it began in July 2017. This has turned out to be the correct call.

Four of our six floating-rate preferreds showed price increases this month. The average gain for the six was 1.0 per cent. In addition to gains, the floaters have been sporting higher dividends each time the Bank of Canada has raised its overnight rate over the past 12 months. Our three fixed-perpetual preferreds also moved up this month, but by a more muted 0.3 per cent.

If you’re looking for a preferred security choice right now, we would recommend the Brookfield SoundVest Split preferreds (TSX—BSD.PR.A) as the only one whose current yield is below its yield to call.

As for your fixed-perpetual preferred holdings, we recommend mostly holding on to them for now. Buy sparingly if their yields creep above 5.5 per cent.

This is an edited version of an article that was originally published for subscribers in the August 3, 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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