In April, the preferred share market, along with other markets, moved down sharply in the days that followed U.S. President Trump’s April 2nd “liberation day”. Trump imposed 10% tariffs on virtually all U.S. imported goods, as well as “reciprocal” tariffs on 60 countries. Equity markets were swift to react, with the S&P 500 plunging over 12%, the S&P/TSX dropping 11%, and S&P/TSX Preferred Share Index falling 7% over the next few days. The sharp market selloff led the U.S. president to pause the reciprocal tariffs for 90 days, with the notable exception of those imposed on China. Market volatility was also increased by Trump’s criticism of Federal Reserve Chair Jerome Powell and his expressed desire to fire Powell. While Trump does not have the legal authority to fire the Fed chair, his threat to the Fed’s independence raised concerns about the safety and stability of U.S. Treasuries. The common equity markets recovered most, if not all, of their losses over the balance of the month. However, the preferred share market only recovered approximately one half of its loss. All types of preferred shares had negative average returns in the month, with rate reset and perpetual issues having negative returns of 3.0% and 3.5% respectively, while floating rate issues fell 4.2%. The S&P/TSX Preferred Share Index ended the month with a return of -3.12%.

Canadian economic data received in April reflected activity prior to the implementation of most of of the new U.S. tariffs, making the data less useful in anticipating future trends. It did suggest, however, that businesses and consumers are acting cautiously in advance of potential economic upheaval from the tariffs. The unemployment rate edged up to 6.7% from 6.6% as a decline in the participation rate failed to offset the loss of 32,600 jobs. Housing starts were weaker than expected and Canadian GDP declined 0.2% in February, but the drop was primarily due to severe weather in the period. Inflation unexpectedly fell to 2.3% from 2.6%, mainly as a result of a decline in gasoline prices. The Bank of Canada chose to leave its administered interest rates unchanged, waiting to evelauate the impact of the U.S. trade war.

In April, Royal Bank of Canada announced its intention to redeem the $600 million RY.PR.J series, with a reset spread of 274 basis points. At the start of the month, the market had been anticipating this redemption, however, the increase in market uncertainty and sharp drop in the market early in the month had investors questioning whether near term bank redemptions would continue. Consequently, the price of the RY.PR.J series had dropped and recovered approximately 3% on the announcement.

Also, early in April, Partners Value Split Corp. announced its intention to redeem the $150 million PVS.PR.I series. The market had been anticipating this redemption, therefore, there was not a significant move in price on the news.

During the month, only one series of preferred shares reset its dividend. 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 issue were as follows:

At month end, Brookfield Renewable Partners had yet to announce whether there was sufficient investor interest to have both the BRF.PR.A fixed rate series and connected BRF.PR.B floating rate series remain outstanding. Also, during the month, Fortis Inc. announced that it does not intend to redeem the FTS.PR.H fixed rate series and connected FTS.PR.I floating rate series. The new dividend rates will be announced in early May and investors in both series will have until May 20th to make their decision to remain in their current series or switch series.

In April, the quarterly S&P/TSX Preferred Share Index rebalancing featured four additions, CU.PR.H, CU.PR.J, IFC.PR.E and IFC.PR.I, and two deletions, BCE.PR.E and TRP.PR.F. During the month, the seven largest preferred share ETFs all had outflows, which in aggregate totaled $136 million.

J. Zechner Associates Preferred Share Pooled Fund

In April, the fund returned -2.43%, which outperformed the S&P/TSX Preferred Share index. The fund’s outperformance was largely a function of security selection, including an approximate 6% allocation to institutional preferred shares that are not in the S&P/TSX Preferred Share Index, and these securities outperformed the index.

Portfolio activity during the month was limited to using cash from dividend income to add to existing positions in ENB.PR.N and FTS.PR.G.

Outlook and Strategy

Given the on again off again implementation of Trump’s multiple levels of tariffs, combined with his narcissistic need to be in the headlines, it is difficult to anticipate how the trade war will unfold. We believe Canada has an advantage in negotiating with Trump because it already has a trade agreement in place. With the U.S. now negotiating trade agreements with dozens of countries, it needs to show that it will abide with existing agreements to close new ones. The U.S. administration seems to recognize that need as Canadian goods in compliance with the free trade agreement known as USMCA or NAFTA 2.0 have been exempted from U.S. tariffs. In broad terms, it seems likely that Canadian economic growth will suffer, although a recession is still only a possibility rather than a probability. We think the Bank of Canada’s recent decision to keep its administered interest rates steady until it can assess the impact of the tariffs makes a lot of sense. Accordingly, we expect the Bank to be on hold until at least its July 30th announcement date.

As noted last month, we are starting the fifth anniversary of a period in 2020 when the 5-year bond yield stayed below 0.50% for several months. In April, this was reflected in the resetting issue increasing its dividend rate more than 200 basis points, and given that it trades below par, the increase in dividend yield was even greater. We expect issues resetting their dividends in the next several months will continue to increase them substantially. In addition, the redemption trend should continue to support preferred shares performance. Investors will receive the $600 million from the RY.PR.J series redemption on May 24th. Also, in the month of June there are some resetting issues with large reset spreads that could possibly be redeemed. The issuers’ decisions should be announced in May.