The preferred share market had another solid month in September. Preferred share performance was supported by anticipated redemption announcements of two series of bank preferred shares as well as by investors needing to reinvest $450 million from the ALA.PR.A/B and FFH.PR.G/H series redemptions at the end of the month. Of note, September had two new issues of perpetual preferred shares, the first new issuance of a $25 traditional preferred share series since April 2022.  All types of preferred shares had positive average returns in the month, with rate reset issues the best performing at 1.2% and floating rate issues the poorest at 0.1%.  Despite the decline in bond yields during the month, perpetual issues lagged the market slightly with an average return of 0.7%.  The new perpetual issues came with attractive dividend rates compared to existing issues which muted the overall return of perpetual issues. The S&P/TSX Preferred Share Index ended the month with a return of 0.80%.

Shortly after Labour Day, we learned the Canadian unemployment rate had risen to 7.1% from 6.9% the previous month despite a decline in the number of Canadians looking for work (i.e. the participation rate). The higher unemployment rate was due to the net loss of 65,500 jobs in August, which followed a drop of 40,800 positions in July. Bond yields fell in reaction to the labour data and inflationary pressures that were not bad enough to stop the Bank of Canada from lowering rates. At 1.9% headline CPI inflation was benign and core inflation remained just above 3.0% but gave no indication of worsening. Under the circumstances, the Bank made a precautionary interest rate cut, although it believed a recession was unlikely. Subsequent data on Canadian GDP showed better than expected monthly growth although the year-over-year change was roughly half Canada’s potential growth rate.

In other news, the United States initiated the renegotiation of the CUSMA free trade agreement between Canada, U.S., and Mexico. Canada and Mexico subsequently started their own respective domestic consultations regarding the agreement. It was scheduled for review by July 2026, so the start of the renegotiation process was not a big surprise. What remains to be seen is what changes the U.S. wants given Trump’s erratic efforts to stimulate U.S. manufacturing and his willingness to apply sectoral tariffs contrary to the free trade agreement. Also in September, the federal government announced that on November 4th it would release its first budget since April 2024. The fourth quarter borrowing plans of the federal government showed a significant increase in net issuance of bonds that led some observers to predict that the federal budget deficit may balloon to $75 billion.

September’s redemption announcements started early in the month when Royal Bank of Canada announced that it will redeem the $300 million RY.PR.M series, which has a reset spread of 262 basis points, on November 24th. A couple of weeks later, TD Bank announced that it will redeem the $200 million TD.PF.E series, which has a reset spread of 287 basis points, on October 31st. In addition, Partners Value Split Corp. announced its intention to redeem the $150 million 4.90% PVS.PR.G retractable series on October 6th. The market had been anticipating these redemptions and there was not a significant move in their share prices on the news, however the redemption trend continues to support the broad market.

During the month, RF Capital Group Inc. announced that it received shareholder and other necessary approvals for its acquisition by iA Financial Corporation Inc. The RCG.PR.B rate reset series will receive par plus all accrued and unpaid dividends up to the effective date of the acquisition. If the transaction closes before March 31, 2026, their next redemption date, an additional amount will be paid per share equal to the dividends that would have been payable on a share until that date.

Also, in September, Artis Real Estate Investment Trust announced that they have agreed to combine with RFA Capital Holdings Inc., a privately held Canadian financial services organization. RFA Capital’s primary business is a licensed bank, RFA Bank of Canada, that provides financing to the residential and commercial real estate sectors. Artis’ preferred units, AX.PR.E and AX.PR.I, will be exchanged into RFA Financial preferred shares with the same terms and conditions, including a dividend rate equivalent to the current distribution rate of the preferred units.  AX.PR.E and AX.PR.I traded down 3.8% and 5.9% respectively on the news, and remained down at month end, as investors are likely unsure of the credit worthiness of the not well-known non-public entity. However, after receiving necessary approvals and closing the transaction, RFA Financial will seek the listing of its common and preferred shares on the Toronto Stock Exchange.

The two new issues in September were both $200 million perpetual series that were upsized from $150 million on strong demand, both from institutional and retail investors. In the middle of the month, Power Corporation of Canada issued the POW.PR.H series with a dividend rate of 5.75%. Two days later, Great-West Lifeco issued the GWO.PR.Z series with a dividend rate of 5.70%. We participated in both new issues, which traded higher over the remainder of the month.

During the month, no series of preferred shares reset their dividends. However, on September 15th enough Northland Power Inc investors elected to remain in the both the NPI.PR.A fixed rate series and the connected NPI.PR.B floating rate series to have them remain outstanding. Consequently, 4,501,365 NPI.PR.A fixed rate series and 1,498,635 NPI.PR.B floating rate series shares will be outstanding going forward.

In September, the seven largest preferred share ETFs had an aggregate outflow totaling $2 million. Each of the ETFs had relatively small inflows or outflows.

J. Zechner Associates Preferred Share Pooled Fund

In September, the fund returned 1.33%, which outperformed the S&P/TSX Preferred Share index. The fund’s outperformance was due to good security selection. For example, following the July announcement that First National was being acquired, the fund’s holding of FN.PR.A shares has continued to appreciate, with the share price increasing 4.6% more in September. As well, the portfolio’s rate reset positions are weighted to the best performing rate reset issues in the month, those with reset spreads greater than 200 basis points and reset dates in 2028 and 2029. These positions were some of the largest contributors to performance.

Portfolio activity during the month included selling the GWO.PR.Y position to add a position in the new GWO.PR.Z issue and adding a position in the new POW.PR.H issue.

Outlook and Strategy

The Bank of Canada and the Fed will each announce their next interest rate decisions on October 29th. We believe both central banks will probably leave their respective rates unchanged but signal that they may lower their rates again in December. The Bank said that its decision to lower rates in September was a close one because it noted strong household spending and inflation that was not yet under control. With its overnight target rate already marginally stimulative, the Bank is likely to continue to move cautiously. As we noted in September, the Bank may wish to keep its powder dry and leave more room for easing in case economic activity slows substantially more.

While there is a trend to lower administered rates, even at a gentle pace, the massive fiscal deficits and resultant need for governments to issue bonds poses a significant risk to bond yields. The Canadian government has announced plans to raise $53 billion of new bonds (net of maturities) in the fourth quarter alone, and any reluctance by investors will result in higher yields. 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 and any resetting issue this month would have reset its dividend rate more than 200 basis points higher. We continue to anticipate that there will not be substantial change to this dynamic in the near term, so we continue to anticipate large increases in resetting dividend rates for the next few months.

In addition, the redemption trend should continue to support preferred share performance. Investors will receive $150 million from the PVS.PR.G series redemption on October 6th and $200 million from the TD.PF.E series redemption on October 31st. We expect most of the redemption proceeds will be reinvested in other outstanding preferred share series. As noted above, in November, Royal Bank of Canada will be redeeming the $300 million RY.PR.M series. Also, as this is being written, TC Energy has announced its intention to redeem the $250 million TRP.PR.G series in November and Pembina Pipeline Corp has announced its intention to redeem the $225 million PPL.PR.I series in December, both subject to the issuance of junior subordinated notes. The market had been anticipating these redemptions.  Furthermore, the market is currently pricing the likely redemption of four additional series, BIP.PR.B, BN.PF.H, CU.PR.I, and FFH.PR.I, totalling $882 million in December.