3 Reasons to own preferred securities today

3 Reasons to own preferred securities today

6 minute read

February 2024

Share

Sign up to get our insights
Subscribe

We believe an exceptional buying opportunity for preferred securities may exist today.

1. Discounts to par value represent uncommon value

Preferreds are trading at discounts to par value not seen since the global financial crisis, representing attractive total return opportunities. Current discounts represent a substantial capital appreciation opportunity for investors, in our view.

Historical average prices by preferreds market

March 2003–December 2023

Historical average prices by preferreds market

2. High-quality preferreds offer some of the highest yields in fixed income

Issued primarily by investment grade companies, preferreds offer 6-8% yields, considerably greater than investment-grade corporate bonds. Their dividend reset structures can also provide advantages in sustained high-rate environments, a benefit not found in typical fixed income investments.

Yield to maturity (%)

January 2014–December 2023

Yield to maturity (%)

3. Performance has been strong following last rate hike per cycle

Since 1990, preferreds have returned 14.2% on average in the twelve months following the end of the rate-hiking cycle (vs. 6.3% for all 12-month periods).

Sign up to get our insights delivered to your inbox

Significant positive performance following last rate hike per cycle
Significant positive performance following last rate hike per cycle

FURTHER READING

Putting recent commercial real estate debt headlines into perspective

Putting recent commercial real estate debt headlines into perspective

February 2024 | 17 mins

We believe the developments at New York Community Bancorp are not indicative of a systemic CRE debt problem or broader systemic stress across regional banks, but they do deserve some further explanation.

What impending resets mean for preferred securities

December 2023 | 4 mins

Upcoming call dates/dividend resets provide preferred securities with a potential catalyst in today's uncertain market. Primarily issued by investment-grade-rated companies, preferred yields are currently in the 7–9% range. Most preferreds come with dividend-resetting structures, potentially leading to income growth for investors in the face of sustained interest rates. Additionally, many securities are selling at 10–20% discounts to par value. Given their historical trend of trading near par, these deep discounts present significant potential for capital appreciation for patient investors.

Yields, regulations reinforce a positive preferred securities outlook

Yields, regulations reinforce a positive preferred securities outlook

November 2023 | 23 mins

We see scope for good relative performance, given appealing valuations and structures that can benefit from high interest rates. Solid issuer fundamentals today and tighter bank regulations to come may provide a credit tailwind.

3362981