Preferred shares enjoyed a strong month in October. After declining to multi-year lows at mid-month, preferred shares surged 10% over the balance of the period. The rebound appeared to be led by bargain hunting by institutional investors. For the month as a whole, preferred shares returned +5.74%.

The Fed’s pointed reminder that rates could still rise in December means that the bond market will assess each new piece of economic data for its possible impact on the upcoming Fed decision. The resultant data dependency likely means the market will move broadly sideways for the next few weeks unless there is a clear change, positive or negative, in the strength of the U.S. economy.

With the U.S. yield curve already relatively steep (long term yields are significantly higher than short term ones), we expect mid-term U.S. issues will experience the greatest increase in yields should a Fed move be judged more likely. That said, longer term bond yields would also likely move higher, just not as much as mid-term yields. In Canada, with the Bank of Canada unlikely to raise its short term interest rates for the next 12 to 18 months, short term yields are unlikely to react much to any change in expectations about the Fed. Longer term Canadian yields, however, are likely to follow their U.S. counterparts. Until the timing of the Feds’ first move becomes clearer, we expect Canadian bonds to trade within the range they have established in the last two months.

New issue supply was relatively light in October, which helped corporate yield spreads to stabilize somewhat. We are hopeful that, when new issues accelerate in November, the new issue concessions will not result in repricing of existing issues the way that they did during the summer months. Corporate bonds are trading at historically attractive yield spreads and we are looking at opportunities to add.

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