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If you think the stock market has been nasty lately, you should check out what preferred shares have gone through.

It's a slaughter, really. These supposedly low-risk widow-and-orphan stocks are in a bear market that looks much worse than what the broader market has been through. The S&P/TSX composite index was down 11.3 per cent for the 12 months to Aug. 31, while the S&P/TSX preferred share index was down 19.5 per cent. The composite has made 15.5 per cent in total for the five years to Aug. 31, while the pref share index is down about 21 per cent.

Sure, preferred share are primarily an engine for churning out dividend income. Preferred share defaults are not a problem, so investors have at least been getting the dividend payments they expect. But the decline in share prices has to be alarming. We have not seen mere volatility or dips in preferred share prices. What's happening appears more like a reassessment of the entire asset class in light of current conditions in financial markets.

Part of the problem is that interest rates are low and could yet fall if the economy continues to struggle. The rate reset preferred shares that account for 60 per cent or so of the pref market were designed to reset every five years so investors could benefit from rising interest rates. Problem is, these shares can also reset to lower rates. Rate resets were a huge hit when introduced in 2008; now, they're nearly a pariah product.

Low rates should be good news for perpetual preferreds, which pay a set dividend and have no set redemption or reset date. But even here, the pref market is weak. Of the 173 shares in the S&P/TSX preferred share index, not even one was in positive territory for the 12 months to Aug. 31.

Preferred shares were annihilated in the 2008-09 stock market crash, but stormed back quickly as the financial world settled down. What will bring the pref market back this time? Possibly the 5.5 per cent yield now being generated by the preferred share index. At a time when five-year Government of Canada bonds yield 0.75 per cent, that's quite the value proposition.

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