The preferred share market traded down with common equity markets on the first day of August due to the release of disappointing employment data in the US. However, over the remainder of the month, like common equity markets, it moved higher and finished with a modest gain for the month. Preferred share performance was aided late in the month by investors needing to reinvest $200 million received from the redemption of the BMO.PR.Y series. All types of preferred shares had positive average returns in the month, with floating rate and perpetual issues having returns of 0.9% and 1.3% respectively, while rate reset issues lagged at 0.2%. The S&P/TSX Preferred Share Index ended the month with a return of 0.22%.

Canadian economic data received in the month was mixed but showed the economy was struggling with the uncertainty of tariffs. The unemployment rate was unchanged at 6.9% only because a drop in the participation rate offset the loss of 40,800 jobs. In addition, on the final business day of August, we learned the Canadian GDP contracted in the second quarter at an annual rate of 1.6%, roughly twice as bad as the consensus forecast. Trade was the main source of the weakness as exports plunged 27%, although the comparison is with the previous quarter when frontrunning of tariffs boosted export volumes. Trade uncertainty was also responsible for a 10% drop in business investment. More positively in the GDP release, we learned that household consumption rose 4.5%. Headline CPI inflation declined to 1.7% from 1.9% the previous month, but core inflation remained stubbornly above 3.0% with the prices of groceries (especially coffee), vehicles (tariffs), and rent and mortgage interest pushing up the average. The weaker Canadian economic data led investors to believe the Bank of Canada may resume lowering interest rates at its next meeting on September 17th.

On the last business day of the month, Fairfax Financial announced that it will redeem the $186 million FFH.PR.G series and the related $64 million FFH.PR.H series, which have a reset spread of 256 basis points. In addition, AltaGas Ltd announced that it will redeem the $169 million ALA.PR.A series and the connected $31 million ALA.PR.B series, which have a reset spread of 266 basis points. The four series will be redeemed on September 30th. The market had been anticipating these redemptions and there was not a significant move in their prices on the news.

There were no new issues of preferred shares in August. 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 the pandemic levels of five years ago. Details of the resetting issues were as follows:

During the month, Enbridge Inc. announced insufficient investor interest in making the switch to the floating rate series and all ENB.PF.G shares will be fixed rate ones for the next five years. With fixed rate dividend rates continuing to be higher than floating rate ones, and many investors expecting the Bank of Canada to continue lowering interest rates later this year and into 2026, investor interest in switching into floating rate issues has been limited. Northland Power Inc. investors in the NPI.PR.A series and the outstanding connected NPI.PR.B series will have until September 15th to decide whether they want to remain in their current series or switch into the other.

In August, the seven largest preferred share ETFs had an aggregate outflow totaling $26 million. It was the second month in a row of outflows after two months of inflows.

J. Zechner Associates Preferred Share Pooled Fund

In August, the fund returned 0.88%, which outperformed the S&P/TSX Preferred Share index. The fund’s outperformance was largely a function of security selection. For example, the portfolio’s position in the FN.PR.A series had a price increase of 7.3% as it continued to move higher on last month’s news that First National is being acquired. Also, a couple of institutional preferred shares paid their dividends in August, which had an outsized positive contribution given these are semi-annual payments versus the quarterly dividend payments of traditional $25 preferred shares.

Portfolio activity during the month was limited to adding a small amount to the existing IFC.PR.K position.

Outlook and Strategy

As this is being written, another disappointing Canadian monthly employment report has been released which increases the likelihood of the Bank of Canada lowering interest rates at its next meeting. However, we are not confident that the Bank of Canada will substantially reduce interest rates in the near term. Canada’s economy is still growing, albeit slowly, and the Bank is rightly concerned about inflation possibly reaccelerating. As well, the current level of Canadian interest rates is already in the middle of the Bank’s estimated ”neutral” range, so there is a less compelling argument for rate cuts here compared with the United States. Also, we suspect the Bank may wish to keep its powder dry and leave more room for easing in case economic activity slows substantially more. If, on the other hand, Canada and the United States arrive at an agreement regarding trade and tariffs, we may see the Canadian bond market rally because the federal and provincial governments may be able to reduce spending on programmes to offset the negative effects of the U.S. tariffs.

The 5-year Canada bond yield remains well above the extremely low levels of five years ago. August was the fifth month in a row that the resetting series of preferred shares raised their dividend rates more than 200 basis points. If the Bank of Canada does lower rates this month, shorter term bond yields will probably decline a little as some investors anticipate additional monetary easing in the future, but 5-year Canada bond yields seem unlikely to decline much until inflationary risks are reduced. We do not anticipate substantial change to current bond yields in the near term, so we continue to anticipate large increases in resetting dividend rates for the next several months.

The redemption trend should continue to support preferred share performance. Investors will receive $450 million from the ALA.PR.A/B and FFH.PR.G/H series redemptions on September 30th, when they will likely reinvest the proceeds in other outstanding issues. In the month of October, the $200 million TD.PF.E series is resetting, which the market is anticipating will be redeemed. The issuer’s decision should be announced in September.