Preferred Securities Market Insight - Rate Volatility Creates Opportunity

Our preferred securities specialists look back at the market’s performance and provide incisive commentary to help you make sense of what drove the market—and what may be on the horizon for preferred investors.

Key takeaways from the latest edition:

Rapid rate sell-offs dragged on preferred returns. The 10-year Treasury rose more than 50 basis points (bps) in September and is now over 100 bps higher year to date. The Federal Reserve (Fed) hiked 25 bps, lifted the target range to 3.75% to 4.00% and signaled that additional hikes remain possible.

This was primarily a rates and term-premium shock, not a credit event. Higher discount rates pressured preferreds, not deteriorating issuer fundamentals. The market demanded more compensation for policy uncertainty, deficits, Treasury supply, oil risk and long-duration exposure.

$1,000-par preferreds continued to outperform $25-par preferreds. The $25-par index declined 4.22% in September and is down 5.70% year to date. $1,000-par investment-grade (IG) preferreds declined 2.18% and are down only 0.54% year to date, while $1,000-par high-yield (HY) preferreds and Contingent Convertible bonds (CoCos) remain positive year to date.

Preferreds could use an October surprise. Lower oil prices could ease inflation anxiety, reduce term premium and help Treasury yields retrace. The key issue is the market transmission from lower oil to lower yields.

Supply technicals remain supportive despite weak price action. New preferred issuance slowed while rates climbed, while redemptions continued in legacy $1,000 par structures with high back-end reset spreads. Year-to-date net issuance remains negative by roughly $7.6 billion across the preferred market, including nearly $8 billion of negative net issuance in $1,000-par domestic perpetual preferreds.