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Rate Reset Preferred Share Selloff May Have Been Overdone

2015-02-11 Financial Post

By David Pett

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The rate reset preferred share market in Canada got clobbered in January, but that only makes the space more attractive, says Ben Jang, a portfolio manager at Nicola Wealth Management in Vancouver.

“It’s very oversold,” he said in a phone interview. “I’m definitely a net buyer at these levels.”

The BMO S&P/TSX Laddered Pref ETF (TSX/ZPR), a proxy for the rate reset market, was down 7.3% last month, its biggest one-month drop since the exchange-traded fund debuted in 2012.

The fund has rebounded a bit this month, but the recovery is just beginning, Mr. Jang said.

He believes the selloff was likely the result of two factors: The Bank of Canada’s surprise rate cut, which made some rate reset issues less attractive to investors; and the Royal Bank of Canada’s latest rate reset issue worth $600-million, which was very attractively priced so investors sold off existing issues.

But given the severe drop, rate resets now trade at spreads close to 250 points above equivalent bonds from the same issuers.

“We haven’t seen spreads like that since the financial crisis in 2008,” he said. That’s very significant and not credit related whatsoever.”om