In a market shaped by tariffs and volatility, we explore how preferred securities are holding up—and where we see opportunity ahead.
KEY TAKEAWAYS
- Market volatility has shifted performance trends: Preferred securities have underperformed Treasuries and investment-grade bonds due to widening credit spreads and recession concerns—reversing last year’s outperformance—though they continue to outperform high-yield bonds.
- Strong fundamentals support the asset class: Despite volatility, the core sectors behind preferreds—banks, insurance companies, and utilities—remain financially strong, with high capital levels and stable cash flows, making preferreds appealing for yield-seeking investors.
- Our focus is on quality and resilience: We have been proactively shifting to higher-coupon, higher reset-spread securities and reducing credit-sensitive exposure—positioning for better performance amid ongoing uncertainty.
Transcript
Let’s discuss the preferred securities market amid recent market volatility driven by the escalation of tariffs.
Most notably, credit spreads widened due to recession concerns, leading treasuries and investment-grade corporate bonds to outperform other fixed income categories, though declining interest rates have partially offset that performance.
This marks a reversal of last year’s trends when preferred securities significantly outperformed treasuries, high-grade corporate bonds and high-yield bonds though preferreds have continued to outperform the high-yield market.
The recent performance is generally expected as investors de-risk in an uncertain environment. But we believe there are several things to note when it comes to preferred securities.
For one thing, the credit fundamentals of our main sectors and issuers remain strong.
Preferreds are typically issued by high-quality, regulated companies with predictable earnings, including banks insurance companies and utilities. That can make preferreds attractive for investors seeking high yields but concerned about market uncertainty.
U.S. and European banks have benefitted from strong profitability over the last couple of years, which has allowed them to build capital to historically high levels. Utilities and pipelines benefit from regulated, stable cash flows that are less affected by economic weakness.
Looking ahead, wider credit spreads are the primary risk to the preferred market. Accordingly, we have been proactively reducing exposure to securities with more credit-sensitive structures.
Instead, we are focusing on securities with higher coupons and higher back-end rests, offering greater resilience against interest rate and credit spread volatility. Additionally, our strategy emphasizes higher-quality securities across all duration buckets.
As we move forward in this environment shaped by heightened volatility, we remain committed to delivering strong performance and adapting our approach to manage risks effectively.
Thank you for your continued trust and support.
FURTHER READING
Five reasons to consider preferred securities if you own municipal bonds
With many investors feeling the sting of taxes, municipal bonds aren’t the only option for tax-advantaged income. Preferred securities currently offer among the highest after-tax yields in fixed income, regardless of tax bracket.
Why passive preferred ETFs miss market opportunities
The market has evolved considerably, but passive ETFs have not adapted. We believe active strategies that invest across the entire market are a better solution.
Why preferreds and high yield make a great pair
With many investors turning to riskier bonds for yield, diversification is key. Pairing high-yield bonds with preferreds, which have attractive yields and distinct characteristics, may complement traditional fixed income holdings.
Data quoted represents past performance, which is no guarantee of future results. The information presented does not reflect the performance of any fund or account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected. There is no guarantee that any market forecast set forth in this video will be realized. There is no guarantee that any historical trend referenced herein will be repeated in the future, and there is no way to predict precisely when such a trend will begin. The mention of specific securities is not a recommendation or solicitation to buy, sell or hold any particular security and should not be relied upon as investment advice.
This video is for informational purposes and reflects prevailing conditions and our judgment as of September 30, 2024, which are subject to change. This material should not be relied upon as investment advice, does not constitute a recommendation to buy or sell a security or other investment and is not intended to predict or depict performance of any investment. This material is not being provided in a fiduciary capacity and is not intended to recommend any investment policy or investment strategy or take into account the specific objectives or circumstances of any investor. We consider the information in this video to be accurate, but we do not represent that it is complete or should be relied upon as the sole source of appropriateness for investment. Please consult with your investment, tax or legal professional regarding your individual circumstances prior to investing.
Index definitions. OTC preferreds represented by ICE BofA Investment Grade Institutional Capital Securities Index. Retail preferreds represented by ICE BofA Core Fixed Rate Preferred Securities Index. Contingent capital securitiesrepresented by ICE USD Contingent Capital Index. Investment-grade corporate bonds represented by ICE BofA US Corporate Index.
Risks of Investing in Preferred Securities. An investment in a preferred strategy is subject to investment risk, including the possible loss of the entire principal amount that you invest. The value of these securities, like other investments, may move up or down, sometimes rapidly and unpredictably. Our preferred strategies may invest in below-investment-grade securities and unrated securities judged to be below investment grade by the advisor. Below-investment-grade securities or equivalent unrated securities generally involve greater volatility of price and risk of loss of income and principal, and may be more susceptible to real or perceived adverse economic and competitive industry conditions than higher-grade securities.
Contingent capital securities (CoCos). CoCos are debt or preferred securities with loss absorption characteristics built into the terms of the security, for example a mandatory conversion into common stock of the issuer under certain circumstances, such as the issuer’s capital ratio falling below a certain level. Since the common stock of the issuer may not pay a dividend, investors in these instruments could experience a reduced income rate, potentially to zero, and conversion would deepen the subordination of the investor, hence worsening the investor’s standing in a bankruptcy. Some CoCos provide for a reduction in the value or principal amount of the security under such circumstances. In addition, most CoCos are considered to be high yield securities and are therefore subject to the risks of investing in below-investment-grade securities.
Duration risk. Duration is a mathematical calculation of the average life of a fixed-income or preferred security that serves as a measure of the security's price risk to changes in interest rates (or yields). Securities with longer durations tend to be more sensitive to interest rate (or yield) changes than securities with shorter durations. Duration differs from maturity in that it considers potential changes to interest rates, and a security's coupon payments, yield, price and par value and call features, in addition to the amount of time until the security matures. Various techniques may be used to shorten or lengthen a portfolio's duration. The duration of a security will be expected to change over time with changes in market factors and time to maturity.
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