It's hard to hide out there.
As U.S. 10-year Treasury yields soar, rising roughly 50 basis points since early May, the market's gone a bit bonkers. And yield-driven securities are the hardest hit.
For the most part, the focus has been on real estate investment trusts, which have been slammed. The S&P/TSX Capped REIT Index is down 11 per cent since May 1.
But preferred shares are facing the same fate. Emera's latest $100-million offering, which closed just a few days ago, is down 10 per cent. Canadian Utilities' two pref deals this year are both off about 6 per cent from their $25 offer prices. And a series of Brookfield Renewable Power preferred shares has plummeted 11 per cent since early May.
Not all preferred shares are in the same boat. TransCanada's latest series is still trading north of its $25 issue price, and Enbridge's recent $600-million blockbuster offering is also holding tight.
However, trading north of their offer price isn't completely comforting for investors who recently bought them in the open market. TransCanada's latest offering traded as high was $26.15 before selling off to $25.40, and Bell Aliant's most recent issue fell to $25.22 from $26.50.
All of this is bad news for Bay Street. REITs and preferred shares have been its bread and butter for the past few years, as retail investors clamoured for any sort of yield. But now these securities are taking a hit, and that's got many people nervous, making it much harder to sell new deals.
The big fear is that the slowdown spreads to fixed-income desks. Many bond investors have already been caught offside by the jump in yields. Anyone who bought long-term bonds in Apple's recent $17-billion (U.S.) offering are down 6 to 9 per cent, depending on the maturity date of their debt.
Because fixed-income investors are skittish, new issue volumes in the U.S. are way down, which the Financial Times notes here. That's the last thing Canada needs.
But keep in mind that the new issue market could quickly bounce back if yields suddenly reverse course. Or at the very least yields could stabilize and that may give investors some time to pick and choose.
In that scenario, David Stonehouse, director of fixed income/portfolio manager at Acuity Investment Management, thinks preferred shares have some promise.
"What's been interesting about the pref market the last few years, is that we haven't seen yields come down to anything like the degree that they have in all other portions of the market," he said. Whereas high yield bonds plummeted to under 5 per cent on average, preferred shares still paid decent rates. "So on a relative basis they actually look more attractive to me now than they have in a long time."
(Tim Kiladze is a Globe and Mail Reporter.)
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