Canadian Preferred Shares (ZPR)
- Yields continue to rise with the Government of Canada 10-year Benchmark Bond recently hitting 1.5% - a pre-pandemic level not seen since January, 2020. This has been largely driven off the U.S. yield curve, where we have seen a continued steepening in the curve. Long-term rates have risen on a number of factors including, further optimism of an economic reopening, growing inflation concerns and expectations that the Fed will have to taper its asset purchase programs at some point.
- The quick rise in yields led risky-assets to pare back gains. Since rates began rising in mid-February, the S&P 500 Composite has fallen 3.0% and the S&P/TSX Composite has fallen 2.2%. The bond market has also felt the effects of higher yields with the FTSE/TMX Canada Bond Universe falling 1.0% over the same period. Preferred shares have continued to hold steady. However, the BMO Laddered Preferred Share Index ETF (ZPR) has gained 0.83% since mid-February, and jumped 9.0% on a total return basis year-to-date.
- Despite Canadian preferred shares being the top-performing asset class since the market bottomed out in late March of last year, we believe there are still tailwinds that remain, such as:
- The likely rise in rates, which will continue as the economy approaches a re-opening, leading to further inflation/reflationary pressures
- Ongoing issuance of Limited Resource Capital Notes (LRCN) and Hybrid bonds, where capital is used to redeem outstanding Canadian preferred shares
- Interest rates remaining low on an absolute level, particularly on the front end, which favours yield-oriented assets such as preferred shares.
ZPR Statistics - Duration 3.11 | 5-Year | 0.91% | Date: March 5, 2021
Source: BMO Global Asset Management, as of March 5, 2021.
Canadian Preferred Shares (ZPR)
- Yields continue to rise with the Government of Canada 10-year Benchmark Bond recently hitting 1.5% - a pre-pandemic level not seen since January, 2020. This has been largely driven off the U.S. yield curve, where we have seen a continued steepening in the curve. Long-term rates have risen on a number of factors including, further optimism of an economic reopening, growing inflation concerns and expectations that the Fed will have to taper its asset purchase programs at some point.
- The quick rise in yields led risky-assets to pare back gains. Since rates began rising in mid-February, the S&P 500 Composite has fallen 3.0% and the S&P/TSX Composite has fallen 2.2%. The bond market has also felt the effects of higher yields with the FTSE/TMX Canada Bond Universe falling 1.0% over the same period. Preferred shares have continued to hold steady. However, the BMO Laddered Preferred Share Index ETF (ZPR) has gained 0.83% since mid-February, and jumped 9.0% on a total return basis year-to-date.
- Despite Canadian preferred shares being the top-performing asset class since the market bottomed out in late March of last year, we believe there are still tailwinds that remain, such as:
- The likely rise in rates, which will continue as the economy approaches a re-opening, leading to further inflation/reflationary pressures
- Ongoing issuance of Limited Resource Capital Notes (LRCN) and Hybrid bonds, where capital is used to redeem outstanding Canadian preferred shares
- Interest rates remaining low on an absolute level, particularly on the front end, which favours yield-oriented assets such as preferred shares.
ZPR Statistics - Duration 3.11 | 5-Year | 0.91% | Date: March 5, 2021
Source: BMO Global Asset Management, as of March 5, 2021.