In contrast with most global financial markets during November, the Canadian preferred share market was mostly oblivious to the surprise victory of Donald Trump in the U.S. presidential election. While equity markets reacted favourably to the more optimistic outlook, bond markets were dismayed by the potential for substantially higher U.S. budget deficits and increased inflation, leading to sharply higher yields and lower bond prices. Preferred shares, though, followed their own course, with prices initially extending the strong rally of October. A sharp decline in preferred share prices in the middle of the month erased earlier gains, however, and the market was unable to recover over the balance of the period. A series of large new issues in quick succession was responsible for the mid-month weakness.

The S&P/TSX Preferred Share index returned -0.65% in November.

Preferred Share Performance in November 2016

Fixed rate reset issues returned +0.05% in November. Higher yields on 5-year Canada bonds in the month plus buying of Exchange Traded Funds (ETFs) that focus on rate reset issues helped support the prices of rate reset issues. Daily volumes of the BMO Laddered rate Reset ETF (symbol ZPR), for example, were markedly higher than normal, and new unit creation of the ETF’s units totalled $92 million in the month. In contrast with rate reset issues, perpetual issues declined -3.23% in the period as higher long term bond yields encouraged some investors to sell their perpetual holdings.

Following a quiet October, there was a resurgence of new issues in November. Details of the five new series of preferred shares were as follows:

Preferred Share Table - November 2016

The TransCanada, Manulife, and Enbridge issues came within a 24 hour period on November 14th and 15th, and the $2.25 billion of supply led to a pullback in the preferred share market. The TransCanada issue was also notable as the first non-financial issue to raise $1 billion. Institutional participation remained strong in the month, with three of the five deals being allocated over 60% to institutions. The Manulife deal suffered from coming the same day as the TransCanada issue; apparently some institutional investors can only handle one deal at a time. The ECN Capital issue was shunned by most institutions probably due to creditworthiness concerns. The fund participated in the TransCanada issue, but skipped the others because we saw better value in existing issues.

Two rate reset issues were extended by their respective issuers in November. Sun Life announced that its SLF.PR.I preferred shares would reset using its reset spread of +273 basis points. That was not a surprise because refinancing the issue would have required a dividend rate over 1.00% higher. Similarly, BCE chose to extend its BCE.PR.K preferred shares using their +188 basis point reset spread.