Preferred Share Update

Market Recap and Commentary

The Canadian Preferred Share market has had a lackluster second quarter and was not exempt from the recent volatility we have seen across asset classes. We have continued to see good performance from the rate reset/floating rate preferred share market as the Canadian 5-year bond yield inched higher from 2.00% to 2.21%. The recent performance of the rate-reset/floating preferred market is of no surprise to us since these securities have negative duration in a rising-rate environment.
With two rate hikes, one in January and the second in July 2018 preferreds have not performed as they should. Bank of Canada Governor Stephen Poloz is doubtful to be in a hurry. There remains a long list of reasons for caution, starting with the real possibility of Canada getting into a trade war with its biggest
trading partner. CIBC chief economist Avery Shenfeld, said “There is no preset calendar to higher rates and how fast they come will depend on how well the
economy does.”
Holders of preferred shares need to be patient and hold the course. Rates will continue to rise in late Q4/2018 or Q1/2019. A portfolio that is overweight in fixed-reset preferreds and a well-balanced fixed income bond selection should result in good returns. The market may have to face some headwinds in 2018 with fluctuating interest rates along with an expected decline in new issues from 2017 levels which should help to keep prices and demand
strong.

ThinkstockPhotos-479555180.jpg

 

Download the PDF report