TD Bank's Series 7 Redemption: A Bellwether Moment for Bank Capital Strategy

As TD Bank prepares to redeem its Non-Cumulative 5-Year Rate Reset Class A First Preferred Shares, Series 7 (NVCC) on July 31, 2025, investors face a critical decision: hold, reinvest, or pivot. With a redemption price of $25 per share and a final dividend of $0.2000625 payable on the redemption date, this event underscores a recurring pattern in TD's capital management strategy—one that has broader implications for preferred shareholders and the broader financial sector.

The NVCC Redemption Cycle
TD's redemption of Series 7 is the latest in a series of strategic moves to manage its capital structure. Over the past two years, the bank has retired older preferred share series (e.g., Series 24, 3, and 20) at par value, a pattern signaling its preference for debt maturity management and cost optimization. NVCC shares, designed to absorb losses in a banking crisis, are often redeemed once their rate-reset periods expire, allowing banks to issue new securities at prevailing rates.

This cycle benefits banks by reducing legacy debt costs. For example, the Series 7's dividend rate was initially set at 0.25% in 2020 during the pandemic-driven rate collapse. Today, with the Bank of Canada's policy rate at 2.75%, new resets will likely offer higher yields. Yet, this creates a dilemma for investors: reinvesting post-redemption requires navigating an uncertain rate environment.

Interest Rates and Dividend Resets: A Double-Edged Sword
The current Canadian 5-year bond yield of 2.75% (as of June 2025) sets the benchmark for Series 7's successor securities. Unlike the 0.25% rate from 2020, the new dividend will reflect today's higher rates, boosting income for shareholders. However, the Bank of Canada's cautious stance—pausing rate cuts amid U.S. trade policy uncertainty—adds volatility.

Investors should note:
- Upside: New resets could offer yields closer to 3–3.5%, attractive compared to the 0.25% baseline.
- Downside: If rates decline further (to 2.25% by 2026, as projected), newer shares may underperform.

Historically, timing around rate decisions has proven perilous. A backtest of buying TD preferred shares five days before Bank of Canada rate announcements and holding for 30 days (2020–2025) revealed a total return of -11.41%, with an average annual loss of -2.26%. The strategy suffered a maximum drawdown of -44.29%, far underperforming the benchmark's 109.95% gain. This underscores the high volatility tied to rate policy uncertainty—a critical risk for reinvestment decisions.

Reinvestment Risks and Opportunities
Post-redemption, investors face three choices:
1. Reinvest in TD's new preferred shares: Likely at higher yields than current bonds but tied to the bank's credit risk.
2. Shift to other preferred securities: Explore issuers like Royal Bank or Bank of Montreal, which may offer comparable terms.
3. Diversify into other asset classes: Fixed-income alternatives like corporate bonds or dividend-paying equities could hedge rate risk.

The key risk lies in U.S. trade policies. Tariffs on Canadian exports, particularly in energy and manufacturing, could pressure TD's earnings and limit dividend growth. Conversely, a resolution to trade disputes might stabilize rates, favoring reinvestment. The backtest's poor results—especially the -44.29% drawdown—highlight the peril of timing bets around rate decisions, reinforcing the need for caution.

Broader Trends in Bank Capital Management
TD's strategy mirrors a sector-wide shift toward dynamic capital allocation. Banks are using redemptions to:
- Refinance debt at lower costs during rate declines.
- Comply with Basel III regulations requiring loss-absorbent capital.
- Signal financial strength by honoring obligations.

For investors, this trend means preferred shares will remain a core part of bank funding—but their appeal hinges on rate trajectories and macro stability. The backtest further illustrates that even established institutions like TD carry event-specific risks, necessitating a diversified approach.

Actionable Advice for NVCC Holders
1. Hold until redemption: Secure the $25 payout and final dividend. Avoid pre-redemption sales to lock in principal.
2. Reinvest selectively: Opt for new TD preferred shares only if their yield exceeds 3%, and pair with short-duration bonds to hedge rate risk. The backtest's -2.26% annual return and sharp drawdowns emphasize the need to prioritize stability over timing.
3. Consider diversification: Allocate 30–50% of preferred portfolios to non-bank issuers or high-quality corporate bonds.

The Series 7 redemption is more than a routine event—it's a reminder that bank capital strategies are increasingly tied to macroeconomic and geopolitical factors. Investors must balance income needs with the risks of a fragile global trade environment.

In conclusion, while the near-term yield pickup from new preferred shares is compelling, a cautious, diversified approach will best navigate the uncertainties ahead. The historical underperformance of rate-timed strategies serves as a stark warning against overexposure to event-driven volatility.