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Why The Rally In Preferred Shares May Not Be Over Yet

Nov. 05, 2017 1:03 AM ETEWC, FXC, QCAN, FCAN, HEWC1 Comment
Aubrey Basdeo profile picture
Aubrey Basdeo

Canada's preferred share market has been rallying for almost two years since bottoming in late-2015, but it could remain an attractive option for income-oriented investors looking to diversify their holdings.

In part, that's because many preferred shares provide relatively high yields in relation to other yield-bearing investments such as Government of Canada bonds. In addition to that, however, the market for preferred shares may continue to get a lift from today's interest rate environment and a potentially more favourable supply and demand dynamic.

Interest rates

The S&P/TSX Canadian Preferred Share Index is about two thirds invested in rate reset preferred shares that are adjusted every five years based on a fixed yield spread above the five year Government of Canada bond. As a result, the index has generally moved in tandem with government yields (see chart below), and may benefit from a period of stable, if not rising, interest rates in the months ahead.

Less supply

Investors may recall that preferred share prices were hurt by a supply headwind in late 2015 and early 2016. At the time, the country's big banks were under pressure to shore up their Tier 1 capital requirements under Basel III and NVCC preferred shares were the only Tier 1 compliant instruments available - at least until now. In September, the Bank of Nova Scotia (BNS) filed a prospectus with the SEC south of the border to issue USD-denominated notes that will also be Tier 1 compliant. Other banks are expected to follow suit, which should mean less bank issuance of preferred shares moving forward.

This post originally appeared on the BlackRock Blog.

This article was written by

Aubrey Basdeo profile picture
Aubrey Basdeo, Head of Canadian Fixed Income, is a member of the Product Strategy Team within BlackRock's Model-Based Fixed Income Portfolio Management Group. He leads the product strategy effort in Canada for both the Institutional and iShares businesses. Mr. Basdeo's service with the firm dates back to 2005, including his years with Barclays Global Investors (BGI), which merged with BlackRock in 2009. At BGI, Mr. Basdeo was the head of the Canadian fixed income business and was responsible for both the management of the Canadian institutional and iShares assets as well as delivering fixed income strategies and solutions to BGI clients. Prior to joining BGI in 2005, he was the head of the Relative Value Fixed Income Group at Ontario Teachers' Pension Plan where he led a team of 6 Portfolio Managers and Analysts responsible for managing the Plan's fixed income assets. Mr. Basdeo earned a BSc in engineering from the University of Waterloo in 1983, and an MBA from the University of Toronto in 2003.

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