Keep connected
Our investment management team is made up of engaged thought leaders. Get their latest commentary and stay informed of their frequent media interviews, all delivered to your inbox.
In March, the preferred share market moved down for the first half of the month as financial markets waited for details on U.S. tariffs that were pushed back to April 2nd. Conflicting comments from U.S. President Trump and his various competing aides made it difficult to anticipate what the tariff policy would be ultimately. However, it appeared that President Trump was determined to impose significant tariffs despite their negative impact on the U.S. economy and the economies of its trading partners. Mid- month, the preferred share market started moving higher for most of the rest of the month. Preferred share performance was helped on the final day of the month when investors looked to reinvest $619 million received from the redemptions of the CVE.PR.E, FFH.PR.E, FFH.PR.F and FFH.PR.M series. However, it still finished the month with a negative return. All types of preferred shares had poor average returns in the month, with rate reset and floating rate issues having negative returns of 0.3% and 1.3% respectively, while perpetuals issues were flat. The S&P/TSX Preferred Share index ended the month with a return of -0.12%.
Much of the Canadian economic data received during March referred to activity prior to President Trump’s early February tariff threats. That data tended to show the Canadian economy was performing well, offering some hope that it would have resilience once the tariffs were imposed. Growth in GDP during January, for example, was better than expected and on a year-over-year basis had increased at a satisfactory 2.2% pace. In addition, the unemployment rate held steady at 6.6%, with a lower participation rate offsetting weak job creation. The balance of trade showed a record monthly surplus in February as individuals and companies made purchases in advance of the tariffs starting. The CPI inflation rate increased more than expected with the end of the GST/HST holiday, rising 1.1% in February and lifting the annual rate to 2.6% from 1.9%. Of concern to the Bank of Canada, the core rate of inflation increased to 2.9% from 2.7%. The Bank chose to lower its overnight target rate to 2.75% from 3.00% despite the increase in inflation. The Bank said the reduction was meant to offset tariff uncertainty, as it would otherwise have left rates unchanged. The Bank also indicated that it expects to proceed carefully with further rate changes.
In March, CIBC issued a $150 million institutional preferred share and a $450 million Limited Recourse Capital Note (LRCN) with the same initial dividend and coupon rate of 6.369% and reset spread of 365 basis points. CIBC had reached its LRCN limit, therefore it needed to issue an institutional preferred share to enable the LRCN issue. The market continues to anticipate the potential redemption of the $300 million CM.PR.Q series, with a reset spread of 279 basis points, on its next reset date of July 31, 2025.
During the month, two series of preferred shares reset their dividends. Dividend rates continue to reset significantly higher because the 5-year Canada bond yield is substantially higher than five years ago. Details of the resetting issues were as follows:
The floating rate option was not available to AIM.PR.A investors because fewer shares than the minimum needed for the floating rate option remained outstanding after 89.1% of the series was tendered in the Aimia Inc.’s substantial issuer bid last month. Also in March, Brookfield Corporation announced insufficient investor interest in making the switch to the floating rate series and all BN.PF.E shares will be fixed rate ones for the next five years. Given the current relatively small advantage that floating rate dividend rates have over fixed rate ones, investor interest in switching into floating rate issues has declined.
In other issuer news, S&P downgraded the preferred shares of Brookfield Office Properties from P-4 to P-4Low. The rating agency notes that the company’s retail segment remains robust however they are less positive on the office segment, where they expect “office operating performance to gradually recover but remain below pre-pandemic levels”. BPO preferred shares were down 1.5 to 2.5% on the news and finished the month down 1.8% on average.
In March, outflows from the seven largest preferred share ETFs continued with an aggregate outflow of $48 million. Only two had small net inflows.
J. Zechner Associates Preferred Share Pooled Fund
In March, the fund returned 0.07%, which outperformed the S&P/TSX Preferred Share index. Fund performance benefitted from holding relatively more perpetual type preferred shares, which was the best performing sector over the month.
Portfolio activity during the month including selling some of the CVE.PR.E position in advance of its redemption. Also, we sold the CIBC 7.365% institutional preferred share position, which had appreciated in price and had a yield to its next call date of less than 5%. Proceeds from these sales and cash from dividend income were used to add to existing positions in BMO.PR.E, NA.PR.S, and TA.PR.J.
Outlook and Strategy
This outlook is being written following Trump’s rambling Rose Garden speech in which he imposed 10% tariffs on virtually all U.S. imported goods, as well as “reciprocal” tariffs on 60 countries. The rates of the reciprocal tariffs were based on a formula that divides a country’s trade surplus with the U.S. by its total exports. Concepts such as relative advantage were not considered. Nor was size of the trade surplus, as reciprocal tariffs were applied to the French archipelago St. Pierre and Miquelon in the Gulf of St. Lawrence, as well as the Falkland Islands. Canada and Mexico were spared (for now) any reciprocal tariffs, but the earlier tariffs on steel, aluminum and autos still apply. Goods that qualify under the USMCA free trade agreement (also known as NAFTA 2.0) will still be tariff free and companies that have not completed the paperwork to register those goods now have a strong incentive to do so. Estimates of the percentage of Canadian exports currently registered under USMCA are in the 38% to 40% range, but new registrations could take that to 80% or more.
The full impact of the tariffs will depend on how countries respond, including retaliatory tariffs on U.S. goods and services. Those have yet to be determined but, on their own, the U.S. tariffs are likely to result in slower U.S. growth and higher inflation in the United States. The slowdown in growth will occur because the increased uncertainty is already showing up in consumers becoming cautious and businesses deferring investments. In addition, U.S. exports are likely to fall as other countries respond. Inflation will rise because the tariffs will increase the cost of imports, and the U.S. will not be able to replace them with domestic production for at least a few years.
In Canada, the trade war uncertainty is also likely to slow economic activity and hurt corporate profitability. However, Canada’s exporters may benefit from the reciprocal tariffs imposed on other countries because that makes Canadian goods relatively more competitive to U.S. buyers. We remain confident in the diversification of the portfolio and the creditworthiness of the issuers in the portfolio. These companies have successfully weathered previous economic downturns without impacting their ability to pay the dividends on their preferred shares.
Also, we believe Canadian inflation is unlikely to change significantly due to the trade war because the Canadian government has chosen retaliatory tariffs on U.S. goods that do not impact day-to-day purchases of average Canadians. Given the relatively good performance of the Canadian economy prior to Trump’s tariff threats, we believe the Bank of Canada is likely to hold interest rates steady at its next announcement on April 16th. Only if there is marked deterioration in the economy in the next two weeks will the Bank move, and that is not enough time for the tariffs to have much impact.
With the 5-year bond yield continuing to be substantially higher than five years ago, the two March resetting issues increased their dividend rates more than 1.6%, and given that they trade below par, the increase in dividend yields was even greater. March marked the fifth anniversary of the start of the Covid-19 pandemic which led to the 5-year bond yield falling below 0.50% in April 2020 and remaining below that level for the remainder of 2020. At the end of March 2025, the 5-year bond yield was approximately 200 basis points higher than at the end of March 2020. Despite the recent decline in bond yields, issues resetting their dividends in the next several months should continue to increase them substantially. In addition, the redemption trend should continue to support preferred shares performance. The market is anticipating the next potential bank redemption, the $600 million RY.PR.J series, with a reset spread of 274 basis points, on its next reset date of May 24th. The bank’s decision will be announced in April.