Despite a month of broad financial market volatility, preferred shares ended with another gain in January. The new year opened with U.S. President Trump dominating the headlines and generating considerable uncertainty in bond and stock markets. January began with the U.S. seizing the President of Venezuela and his wife on drug trafficking charges. Trump then turned his attention to Greenland demanding Denmark surrender ownership. Initially, military force was not ruled out, raising concerns about the durability of NATO, but then Trump chose to threaten additional tariffs on eight European countries that supported Denmark. While Trump eventually backed down following sharp declines in U.S. bond and stock markets, the event left international investors wondering about the prudence of investing in an unreliable ally. Trump finished the month by nominating a successor to Jerome Powell, the Chairman of the U.S. Federal Reserve, to mixed reaction in financial markets.

Early in the month, Brookfield Renewable Partners announced that they would be redeeming the $175 million BEP.PR.G series, which had a reset spread of 447 basis points. After preferred shares traded in a lacklustre fashion much of January, the reinvestment of the BEP.PR.G redemption proceeds on the final trading day pushed the preferred share market to a positive return for the month. All types of preferred shares had positive average returns, with rate reset issues returning 0.8% while perpetual issues lagged at 0.3%. The S&P/TSX Preferred Share Index ended the month up 0.39%.

Economic data received during January showed the Canadian economy was continuing to struggle with the effects of an uncertain U.S. trade policy. Canadian GDP failed to grow at all in the most recent month (November) and had increased by only 0.6% in the most recent 12-month period. The unemployment rate rose to 6.8% from a revised 6.6% the previous month, although most of the increase was due to an increase in the participation rate. Inflation data was mixed with the annual rate rising to 2.4% from 2.2%, but the core measures of inflation improved to 2.6% from 2.8%. The constant shifting of U.S. trade policy, with tariffs threatened, sometimes applied, sometimes not implemented, has resulted in considerable volatility in Canada’s trade balance. It was estimated that the November trade deficit was $2.2 billion, following a much smaller deficit in October and the surprise surplus of September. That volatility is likely to continue at least until the CUSMA trade agreement is renegotiated. In other financial news, the Bank of Canada, as widely expected, left interest rates unchanged at its January 28th meeting.

In January, ECN Capital Corp announced that its November agreement to be acquired by an investor group led by Warburg Pincus LLC. had been approved by its shareholders. The investor group will acquire the issuer’s preferred share series, ECN.PR.C, which is not redeemable until June 30, 2027, for $26.00 per share plus all accrued and unpaid dividends. Completion of the agreement, expected to close in the first half of 2026, remains subject to other customary conditions including receipt of final legal and regulatory approvals.

There were no new issues of preferred shares in January. During the month, one series of preferred shares reset its dividend. The dividend rate reset significantly higher because the 5-year Canada bond yield was substantially higher than the pandemic levels of five years ago. Details of the resetting issue were as follows:

During the month, Power Financial Corporation announced insufficient investor interest in making the switch to the related floating rate series and all PWF.PR.P shares remained fixed rate ones for the next five years. Similarly, TC Energy announced that an insufficient number of investors in the TRP.PR.C series, which reset in December, wanted to switch series and all those shares will remain fixed rate ones. With fixed rate dividend rates continuing to be higher than floating rate ones, investor interest in switching into floating rate issues continues to be limited.

In January, the quarterly S&P/TSX Preferred Share Index rebalancing featured six additions, BCE.PR.G, BN.PF.M, CU.PR.F, CU.PR.K, IFC.PR.M, and POW.PR.I, and one deletion, PWF.PF.A. During the month, the seven largest preferred share ETFs had an aggregate inflow totaling $19 million.

J. Zechner Associates Preferred Share Pooled Fund

In January, the fund had a return of 0.38%, in line with the performance of the S&P/TSX Preferred Share index. The fund’s relatively small allocation to low reset spreads (i.e. less than 200 basis points) that had the strongest performance in the month was a drag on performance. However, this was offset by the strong performance from the fund’s approximately 7% allocation to institutional preferred shares that are not in the S&P/TSX Preferred Share Index.

We chose to allow dividend payments in the month to accumulate as we looked for more attractive investment opportunities.

Outlook and Strategy

Most economists expect the Bank of Canada will make few, if any, changes to interest rates in 2026, given the current low level of rates offsetting relatively weak economic growth. In discussing the decision to leave interest rates unchanged at its January 28th meeting, Bank Governor Tiff Macklem noted that “elevated uncertainty makes it difficult to predict the timing or direction of the next change in the policy rate.” We believe the Bank is likely on hold for the next few quarters unless the economy weakens further. As a result, we anticipate that bond yields will be in a trading range for the next few months.

The 5-year Canada bond yield remains well above the extremely low level of five years ago. For example, the resetting Power Financial Corporation issue in January increased its dividend rate more than 250 basis points. Given that the issue trades below par, the increase in yield was even greater. We expect the 5-year Canada bond yield to remain in a trading range near current levels for the next few months. Consequently, we continue to anticipate large increases in resetting dividend rates in the near term.

In addition, although redemptions are expected to be lower in 2026 than in 2025, they should continue to support preferred share performance. Even small redemptions can have a positive effect on performance, as evidenced by January’s redemption. Some issuers have used the proceeds from Limited Recourse Capital Notes and hybrid bonds to redeem preferred shares. The current coupon levels and reset spreads available to issuers in these two markets continues to make it economically advantageous to redeem high reset spread series. If this condition continues it should be supportive of the redemption trend.