Bonds. Canadian bonds went up something like 9% last year, but that was a rebound from a weak 2013. We actually had a negative return on the Canadian bond index in 2013, and people in the bond market had thought this was the end of the low interest rates that we saw in 2013. In 2014, we realized that tapering wasn’t a bad thing that everybody thought it was, so we had a really hard rally down again when interest rates dropped. 8.8% total return, on the Canadian bond index last year. He is overweight on the corporate bond markets, where spreads haven’t compressed yet.

What do “D+18” and “FF” mean in corporate bonds? FF is a “Fixed Floater”, which means the bond is fixed for a certain period of time, and after that time it begins to float. In Canada it is a rare for it to go past the fixed point. The D+18 means the company has the right to Call that bond at the Deposit Rate +18 basis points. This is usually quite a bit tighter than where the market usually trades the bond.

Interest rate drop. How does this look with the new issues of banking preferreds, high-yield, corporate debt, etc. You are looking at much, much lower yields, but he thinks there is a limit there, but doesn’t know what it is.

This company is a very large part of the preferred share market in Canada, roughly about 10% of the market. Enbridge Inc has done a “drop down” procedure that a lot of energy companies are doing right now. They took about $17 billion in assets and dropped them down to their subsidiary income fund. This caught investors and credit rating agencies by surprise. The assets don’t go away. Right now there seems to be a little bit of risk as to whether they will continue this procedure, but he thinks they are fine and the company is going to recover.

(A Top Pick Sept 8/14. Down 0.77%.) BMO Floating Rate Preferred Share Series 17. Shouldn’t be volatile except when the bank of Canada rate drops. It was up on the year, but as soon as the interest rate cut came in, it dropped. This was a defensive strategy for people who thought rates were going to go up. It is still a pretty good substitute for a Money Market type of return, plus you get the dividend tax credit.

(A Top Pick Sept 8/14. Down 1.87%.) Enbridge Inc. 4.40% Series 11.

(A Top Pick Sept 8/14. Up 4.73%.) Great West Lifeco 5.25% Series S.

$5000 in an RESP to run for 13 years. Suggestions? He would suggest looking at either a fund or an ETF. You could also look at individual preferred shares.

Preferred M’s? This is a reset, which went to reset in 2013. Started at a higher rate and then reset to a fixed rate at 3.39%. In this environment, it won’t reset again until 2018. The bad news on this is that he doesn’t think the bank would let it go to the next reset because of capital issues. This might be worth getting out of and then switching over to something else, perhaps insurance companies.

Preferred series E 4.5%. (EMA.PR.E-T). A perpetual, paying about $1.25 annually. Has current yield of about 4.8%. Currently trading at $23.45 giving you over a 5.5% yield if they take you out in 2023.

Preferred series C 5%. (CCS.PR.C-T). This can be redeemed in 2016 at $25. Currently trading at $24.31, below its par value. It gives you yield of 7.36%.

Preferred series G 4.75%. (ALA.PR.G-T). Energy pipeline. This is trading a little bit above par. It resets in 2019 and is 306 basis points, so you have the spread protection.

Bonds. Bond performance this year has generally been terrific. Doesn’t think any bond manager in Canada thought that we would see a 6.5% return year-to-date or a 7.6% return year-over-year. We were coming up with such a bad year last year with a small negative performance on the overall bond index with an even bigger negative return on preferred shares. There was a lot of fear, but we are really having a terrific year. He starts top down with a macro view and then starts getting into sectors and countries. Obviously the US is doing very well. Canada a little softer. Europe is still in a kind of quagmire. We are in the 4^th quarter where we will eventually get into rate increases, which is usually danger for the bond market. It usually lasts only a short period of time, but it is the period of time that people remember and are most fearful of. Easy money has been made, so at this time you have to be really selective.

Preferred A’s. Very low rated at P4. It’s also a very small issue. This is a lot more risky in the world of preferred shares. It is yielding quite nice, but there is a reason the yield is so high.

Good time to purchase a European bond? Which type? Corporate, high-yield or government? Europe is a good place, but you have to be careful. When you’re talking about corporate or high-yield, it is a very different environment there than what is in North America. Financing tends to be through banks so there are a lot of bank issues. It might be best to play this through an ETF or an index. Sometimes it is better to take your time, work through an advisor and look for opportunities that make sense for your portfolio.

Owns Government bonds. 20-25 years at 4%-4.5%. This would be subject to more volatility. The further you go out, the more volatility there is. However, the Government of Canada is a good solid credit. Surprised at the high interest rate, but this was perhaps purchased 30 years ago. A 10 year bond today would be around 2%.

T-bills, one year, 10 year, etc. are always quoted at current yield. What are the coupon rates and are they always set at the same rate? Coupon rates are not always set at the same rate. Usually bond managers are looking at yield to maturity. Each quarter, the Bank of Canada will issue new bonds, usually a 2, 5, 10 and 30 year bonds, or they may add to existing issues. There are approximately 50 existing issues being traded right now, and each day they get shorter and shorter. The 10 year bond you got last year is now a 9 year bond. As it comes down the yield curve, the coupon stays fixed. In order to make up for that yield differential, the price goes up. Sometimes they do quote current yield, which is basically just that coupon over the current price. This is not very accurate, so bond managers use a calculation called yield to maturity. This is the true yield that you should be using.

Closed End Bond Funds. What are the risks in holding this fund until it winds up? You don’t see too many of these around, because there are usually pretty hefty fees on them, which makes it pretty tough to make any money.

(A Top Pick Sept 30/13. Up 14.64%.) This is for the longer term investor. Still likes this one. Feels it has a lot more to go.

(TD.PR.T-T) (A Top Pick Sept 30/13. Up 4.35%.) Has done a little bit better than expected. This is really defensive and more for the short-term investor.

(VSN.PR.A-T) (A Top Pick Sept 30/13. Up 10.93%.) This is a rate reset and it got pummelled because it wasn’t one of the bank issues.

Building a 10 year ladder. With most bonds selling at a premium, won’t this result in capital losses? A ladder is a passive strategy and not a bad way to go. All the bonds now have a premium. They were issued with a fixed coupon, rates have come down and the price of the bond is at a premium. As a bond manager, he looks at “yield to maturity” and takes a little bit off the coupon that you would be getting and this does shrink the yield. He would do it with corporate bonds rather than government, or perhaps mixed, when they are at a premium. A better way to do it would be through a fund or an ETF, instead of doing a ladder.

Convertible Bond Fund? Convertible bonds are kind of a mysterious animal, especially in Canada. Looks like a bond in every way, but at some point there is a conversion feature. Usually, as the underlying stock starts taking off, you can convert to the stock. Usually it is weaker companies, weaker credits that issue these. A good way to play it would be through the iShares Convertible Bond Index ETF (CVD-T).

Preferred Series AG, perpetual dates in 2016. This series is a perpetual preferred and is the longer term. These come up for redemption after, usually about 5 years. This one is 2016 for the 1^st call and is $26. They were originally issued at $25. The bank usually doesn’t call these. Each year following that, the Call price of $26 goes down by $0.25 until it gets to $25 again. Usually at that point they will Call.

Preferred Series B. 5-year reset that expires in 2015. On these resets, in 5 years time, the company will either redeem it, or it will go to Reset and the company has the option to go fixed or floating at the predetermined reset spread over a 5-year Canada for the fixed portion, or that same spread over a T-Bill. It will run for another 5 years as a floater, and will probably float down. The reset spread that was 1^st established 4 years ago was only 128 basis points. That is not really big on a five-year bond. He tends to shy away from these things.

BMO Floating Rate Preferred Share Series 17 (BMO.PR.R-T) This is more of a defensive play. It can be Called at any time at $25. This came with the reset spread of 165, so you are getting a T-bill rate, which is around 1%, +165 basis points, 265 for basically a money market piece of paper. If rates go up, you are going to get more money.

Great West Lifeco 5.25% Series S (GWO.PR.S-T) This was a recent issue. 5.25% from a good solid insurance company. Currently it is trading slightly over par. The $26 Call starts in 2019, and then goes all the way down to 2023. At $25 it could be redeemed by the company.

Enbridge Inc. 4.40% Series 11 (ENB.PF.C-T) This company has quite a few issues outstanding. They started issuing a little bit higher rate and this one is fairly new. This is a top rated energy oil/gas pipeline company. It will possibly go to Reset in 2019. You are getting some protection at a 264 basis points over the Canada or the floating-rate.

Interest Rates. Thinks they are going to stay low for at least a year. We are getting improvements in the economy, probably better than what we were doing in the fall. However, we are still getting muted inflation, there are no wage gains and consumer debt levels are high. The consumer really isn’t in a position to spend their way out of this so it is going to be a muted recovery. Federal reserve still has to finish the ending of the quantitative easing program. We are probably looking out about a year before we can get serious about talking about interest-rate increases. Also, any increases will be slow and incremental. The best place to be is the short end of the curve in short dated maturities. For the last 18 months, he has been overweight in corporates in his broad mandated portfolios and of short duration.

Preferred shares as a fixed income vehicle? Preferred shares are really undervalued at this time. It’s a really misunderstood market that doesn’t have a lot of institutional players. We are playing catch up at this stage and he thinks they are really great value. Prefers insurance companies over banks as there is more yield in them. You are receiving dividends, not interest so you get a preferential tax treatment.

Target bond ETFs. This is a basket of bonds, very short, around a maturity date. The ETF will terminate, usually late in the year, of that date. For example, with a target date of 2018, the company will wind down that ETF on Nov 30/18. Most of the bonds will mature at that time. As it gets closer and closer to maturity, the actual value will get closer to the original NAV and they will distribute whatever is left at the end. An example of a target bond ETF would be RBC Target 2014 Corp. Bond ETF (RQB-T).

Interest rates of corporate debt versus yields of their preferred shares? Would this differ between perpetuals and resets if both are trading below par? The gap between the bond yield and the preferred does matter somewhat and tend to follow what the corporate bonds do. We measure things in fixed incomes with the spread, usually over Canada so resets tend to be spread off of the 5-year Canada. However, the relationship is very, very loose because you also have the equity on the other side and the pref yield cannot be driven lower than the common.

Laddered bonds coming due and interest rates are atrocious. Should this be put into preferred shares? If the money is RRSP, you are not going to get the tax advantage of preferred shares, but you will still get a really decent yield. He would think that is where the value is. You are taking a step down in the capital structure, but preferreds look and act so much like bonds and you are getting all the pickup in yield, it is well worthwhile to look at.

(A Top Pick March 15/13. Down 0.58%.) Preferred E series 4.25%. Trading above $1.30 lower than it was last year. Thinks this one will do better as we go along.

(A Top Pick March 15/13. Up 1.36%.) Preferred S series 4.8%. This is a perpetual and pays a $1.40 in dividends. Has been a little bit weak because of their longer date, but still represents great value. Still likes it.

(A Top Pick March 15/13. Up 4.01%.) Preferred 4% Series 7. Has held its value fairly well. Most people would expect that it is going to be called.

Is now a good time to buy Real Return Bonds for 2026 for a ladder? Not a big fan of Real Return bonds. A Real Return bond usually has a fixed coupon plus it pays whenever the CPI rate is. These really came out for pension fund managers that had an established book of business that they were paying out indexed to inflation. You really have to ask yourself whether or not there is going to be inflation because this is what they were designed for.

3.5% Reset preferred. This is sort of a fixed floater. It’s the old-style resets before we got what we have now. As you come to the reset date, it has not been predetermined what you will get at that time, fixed or floating, but the company is going to tell you what they are going to pay.

Safest and most secure place to park cash for 10 months? There are options such as floating rate funds and he would recommend a floating rate preferred which gives you some protection if rates go up. Trading with a yield of about 3%.

Brookfield Preferred Shares Series E. (BRF.PR.E-T) Really likes these. These are one of the ones that he thinks it should do better. 5% dividend. Trading at around $21 so the current running yield is almost 6%.

Preferred series 28. 3.8% coupon. This is the only bank reset out there. Prefers insurance companies over banks. This is a reset that has held up and is coming up for reset in November 2017. Has a higher back end of 243 basis points so you have some protection there as we come up to reset. Pays a decent coupon of 3.8.

Preferred series F. Likes the company. In the preferred share markets it is a solid P2. Have great capital plans. Have 12 or 14 issues in the preferred share market. Most of them are at a 4% coupon. This will come up for reset in 2018. The reset spread is 251 so at that time you will get either 5 year Canada +251 basis points or T-bills. Most likely it will be called in.

Floating rate Preferred shares. Yielding about 3.7%. Rated P3. If interest rates go up, the yield goes up. The one downside is the concentrated real estate, but their portfolio is so large and diversified, it is hard to think that they would be hurt. That is the only negative thing he can think of.

Preferred B Series II. This is sort of an old-style where it trades off the prime rate. If the primary goes up this will go up. Trades on the par value of $25, 70% of prime. Pays a dividend of about $0.52 per share. That could grow if rates go up. Was trading as high as $24 plus and is now down to $17.58. Really good value.

Preferred E 5% Series 5. This is a perpetual and won’t get called until 2018 at $26 and starts dropping down the Call price. Current yield is 5.81%. The yield to Call out to 2022 is 7.38%, which is a bond equivalent of almost 10%.

Preferred Y 4% Series 3. This is a rate reset and will go to reset in 2019 with a reset spread of 238 basis points. Trading a little over 4% currently with a 4.5% yield to reset.

Markets. Markets don’t like uncertainty. Right now it is a “risk off” trade so people are leaving the equity market but haven’t really flooded into the fixed income market yet, so we’re kind of flat. Coming into the year, government bonds were at such low levels, but we got to the point in May where we were seeing positive growth and inflation was tame. That has all been reversed since May where the US government stated they were really dependent on the economic data, where they needed to see unemployment improve and inflation, come up a little bit. For the next 6-12 months we are sort of in a safe zone where he doesn’t expect rates will go much higher.

If the underlying equity is good quality, are convertible debentures a good way to get downside protection in a rising interest rate environment? In theory, this works great, but unfortunately there are a lot of convertibles that come out that are really weaker companies. In Canada, we don’t have that many convertible issues as there isn’t the market for them. Although it sounds good at the start by getting any percent coupon on a weak company, at times it works against you in a rising rate environment. You really have to be careful and know the companies you are buying.

What factors differ do you look at when deciding whether to buy bonds of a company versus its equity? With bond investors, you are playing a banker, not an owner. You are really asking yourself, will I get my money back. Credit ratings is a great starting point, whether it is investment grade are not, high-yield. You also have to understand the industry, management, etc.

J series preferred shares? One of his favourites. A perpetual type, a longer-term, and the 1^st redemption date is in 2021. It will wind down from the 1^st call of $26 with a face value of $25, so they could take you over with a $1 premium and then each year thereafter, it will go down by $0.25. In the meantime, you are collecting a $4.75 coupon. Currently trading at roughly $23.50, so on a yield basis, it is a little over 5%. More susceptible to interest-rate movements than a shorter-term one.

Target bond ETFs. Is there any way of knowing the “face value” of a target bond ETF? A target bond is a fund that has very specific maturity dates and you can buy anything up to that maturity date. There isn’t really a face value or a price on a target bond, because it is a pool of bonds. This is a reasonable investment for an investor who has a specific event in their life that is going to come up, such as a child or grandchild that is going to university in 5 or 10 years.