The preferred share market had a poor month in September with the dominant concern for preferred share investors being the acceleration of the global bond market selloff. A jump in oil prices in the first half of the month played a role in the rise in yields. However, oil prices gave up much of their gains in the second half of the month, but yields continued to move higher. Volatility was elevated compared with recent months, especially on September 23rd when the bond market experienced its worst day since the Liberation Day tariff announcement in April 2025. A defiant U.N. speech by Iran’s president helped trigger the weakness, but interest rate increases earlier in the month by several central banks, including the U.S. Federal Reserve, also played a role.

During the month, there were two redemptions announced and one new institutional preferred share issued. Also, on the last day of the month, investors received $250 million from the IFC.PR.C redemption. The positive effect of redemption activity did not overcome the negative effect of higher bond yields on performance. Perpetual issues experienced the most downward price pressure, generating a negative return of 5.8%, while rate reset issues had a negative return of 1.3%. The S&P/TSX Preferred Share Index ended the month with a return of -2.53%.

Canadian economic data received during September showed the economy was growing, but slower than its potential pace and with excess capacity. Year-over-year growth in Canadian GDP slowed to 1.4% in July, but preliminary estimates for August showed a rebound to 1.8% growth. Similarly, retail sales declined in July, but StatsCan’s flash estimate for August showed a very strong recovery. The unemployment rate held steady at 6.4% as a decline in the participation rate offset a drop in total jobs. Importantly for the Bank of Canada, CPI inflation held steady at 3.0%, with little broadening away from energy as the core measures of inflation remained close to 2.0%. The Bank of Canada left its overnight target rate at 2.25% but indicated it was concerned about high energy prices potentially leading to more widespread inflation.

In September, National Bank issued a $750 million institutional preferred share with an initial dividend rate of 6.57% and reset spread of 292 basis points. National Bank had reached its Limited Recourse Capital Note (LRCN) limit, and it needed to issue an institutional preferred share to enable any future LRCN issuance. There was strong demand for the issue, and it finished the month trading above par. Also, it was noteworthy, while not having a preferred share series to redeem until 2029, Royal Bank issued a $1.0 billion LRCN at coupon rate of 6.275% and reset spread of 271 basis points.

Brookfield Corporation announced the redemption of the BN.PF.K and BN.PF.L series, which total approximately $100 million. These series were issued in 1996 with non-standard redemption values of $22.44 and $22.00, respectively. The market was surprised by these redemptions and their prices moved up more than 20% on the news. Investors will receive the redemption proceeds on November 1st.

During the month, one preferred share series reset its dividend. The dividend rate reset significantly higher because the 5-year Canada bond yield remains substantially higher than the pandemic levels of five years ago. Details of the resetting issue were as follows:

IssueExisting Fixed Dividend Pricing DateExisting Dividend RateNew Fixed Dividend RateNew Floating Dividend Rate
BPO.PR.RSeptember 20214.300%6.829%5.770%

During the month, Brookfield Office Properties announced insufficient investor interest in making the switch to the related floating rate series and all BPO.PR.R shares will remain fixed rate ones for the next five years. In addition, in follow up to the August reset of the SLF.PR.H series, Sun Life Financial announced an insufficient number of investors wanted to remain in or switch to the outstanding related floating rate SLF.PR.K series to keep it outstanding. Therefore, all SLF.PR.K shares were delisted and all investors will hold SLF.PR.H shares with a fixed rate dividend for the next five years. 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.

Also, during the month, BCE Inc. announced that the new dividend rate for BCE.PR.T will be set on October 13th at the 5-year Canada bond yield multiplied by 155%, the percentage rate determined by BCE Inc. BCE.PR.T investors will have the right until October 19th to switch to the related outstanding floating adjusted prime rate BCE.PR.S series, and holders of BCE.PR.S vice versa. Both series require at least one million shares to remain outstanding or there will be an automatic conversion to the other series.

During the month, the seven largest preferred share ETFs had an aggregate inflow totaling $37 million. Only the actively managed HPR and RPF ETFs had small outflows.

J. Zechner Associates Preferred Share Pooled Fund

In September, the fund had a return of -2.06%, thus outperforming the S&P/TSX Preferred Share index. The fund benefitted from its approximate 11% allocation to LRCNs and institutional preferred shares, which are not in the index and significantly outperformed the index with a collective flat return on the month.

There was no portfolio activity during the month. We allowed dividend payments to accumulate as we look for attractive investment opportunities.

Outlook and Strategy

We believe the Bank of Canada is unlikely to change its interest rates over the remainder of this year. The twin concerns of inflation and relatively weak economic growth should keep balancing each other for the next few months. However, we are monitoring inflation closely as a significant broadening of price increases outside of energy might prompt the Bank of Canada to increase rates. The correlation of Canadian bond yields with global ones during the recent selloff occurred despite differing central bank approaches. Should other central banks, including the Fed, continue to raise interest rates while the Bank of Canada stands pat, we may see some additional weakness in the Canadian dollar.

As this is being written, the U.S. mid-term elections are roughly a month away. With polls suggesting the Republican party is at risk of losing control of both the House and the Senate, U.S. President Trump is becoming increasingly desperate for some policy successes to try to reverse his deteriorating approval ratings. The Iranian government, though, seems unlikely to want to assist Trump, so any ceasefire or truce will have to wait until after the elections. Oil prices will therefore continue to be elevated and volatile, which will mean inflation concerns will continue to impact the bond market.

Canadian trade negotiators, though, may be able to reach an agreement with their U.S. counterparts in October, because of the pressure on Trump to achieve any credible success before the election. After the election, Canada’s leverage will diminish in our opinion.

In September, the 5-year bond yield remained well above the extremely low level of five years ago resulting in the resetting issue increasing its dividend rate more than 250 basis points. We expect the 5-year Canada bond yield to remain in a trading range near current levels and anticipate large increases in resetting dividend rates in the next few months. However, as noted last month, these increases are likely to decline over the coming months absent a significant rise in the 5-year Canada bond yield. In addition, with only one issue, which is unlikely to be redeemed, resetting over the remainder of 2026, the redemption trend that has supported the market will likely be limited in the near term. Nevertheless, we remain optimistic about the preferred share market as robust demand for new issues reflects continued investor demand for their attractive tax-advantaged dividend income.