What’s driving the surge in rate-reset preferred shares? Andrew Allentuck Published May 4, 2021
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Prices of rate-reset preferred shares, which pay dividends at a fixed rate until they’re reset every five years, have been soaring. And as interest rates rise, these shares’ payouts will increase as their rates reset – regardless of what their issuers’ common stocks do on the basis of sales or profits.
Rate-reset preferred shares make up three-quarters of the S&P/TSX Preferred Share Index, which has risen by 56 per cent since hitting a low on March 16, 2020. Meanwhile, the S&P/TSX Composite Index has risen by about 62 per cent in the same period. Looking ahead, investors are pushing the prices of rate-reset preferred shares even higher in anticipation of further interest rate increases.
Andrew Allentuck
As 2021 opened, bond yield curves steepened on Jan. 6, U.S. 10-year Treasury yields hit 1% for first time since March of last year. The economy may feel as if it’s beginning a cyclical recovery, but there are several key differences between a recovey and what’s unfolding now.
Ordinary consumer spending has been deferred while ultra-low interest rates have supported purchases of houses and durable goods. The unemployment rate is high (8.6% as of Dec. 31) and consumer debt has soared.
Will bond prices rise, hold or stumble in 2021?
Avery Shenfeld, chief economist with CIBC, said the outlook is grim. “Government bond yields will be low, but they will climb. Reflecting recovery, the yield curve will steepen.” He added that the Bank of Canada is likely to reduce quantitative easing.
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