Preferred Securities Market Insight - Fundamentals Remain Strong, but Listed Preferreds Face Technical Headwinds

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:

Institutional preferreds continued to outperform exchange-listed preferreds. The ICE BofA US Institutional Capital Securities Index (CIPS) returned +0.43% during June compared with -0.73% for the ICE BofA Core Plus $25 Par Preferred Index (P0P4). Contingent capital securities also remained a strong performer, returning +0.58% during the month.

Performance divergence was driven primarily by technical factors rather than interest rates. While front-end Treasury yields moved higher, the 10-year Treasury finished the month essentially unchanged, and the 30-year Treasury yield declined modestly. We believe passive ETF rebalancing, increased convertible preferred supply and weakness in preferreds issued by digital-asset treasury companies weighed disproportionately on exchange-listed preferreds. Importantly, the institutional $1,000-par preferred and contingent convertible (CoCo) bond indexes have no exposure to convertible preferred securities or digital-asset treasury issuers.

The Federal Reserve adopted a more hawkish, data-dependent stance. Under chair Kevin Warsh, the June Federal Open Markets Committee (FOMC) meeting removed much of its forward guidance and reinforced its commitment to restoring price stability. Fed funds futures now price one 25-basis-point (bps) rate hike by year-end, compared with expectations for two rate cuts at the beginning of the year.

Bank fundamentals remain exceptionally strong. All 32 participating banks successfully passed the Fed’s Comprehensive Capital Analysis and Review (CCAR), maintaining capital levels comfortably above regulatory minimums under the severely adverse testing scenario.

We remain constructive on institutional preferred securities. We also see better valuations in $25-par retail securities following the recent technical-driven sell-off. We believe we’re in a range-bound interest rate environment, with the Fed on hold for the near future and carry likely to be the primary driver of fixed income returns. Preferred securities remain well positioned in that environment, particularly institutional preferreds and CoCos.