Preferred Securities Market Insight - Preferred Coupons Stay Healthy as Back Ends Slim Down
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:
The trend toward lower back ends. New-issue preferred coupons remain attractive by historical standards, but reset spreads have moved meaningfully tighter. Investors can still recieve healthy current income, but issuers are increasingly reducing the back end, which makes extension value less attractive if securities aren’t called.
Macro volatility weighed on preferreds as yields moved higher. July was a more difficult month for fixed income as renewed tensions around the Strait of Hormuz pushed oil prices higher, causing bond yields to rise and markets to discount otherwise benign inflation data. The 10-year Treasury closed the month at 4.74%, up roughly 30 basis points (bps), while the 30-year moved above 5.25%, its highest level since 2007, creating a headwind for fixed-rate preferred securities.
Bank earnings remained a fundamental bright spot. Second-quarter results were uniformly strong. All six major banks beat estimates, led by JPMorgan’s record $21.2 billion quarterly profit, and regional banks reported similarly clean credit trends. Results were supported by resilient net interest income, strong capital markets activity and low provisioning for credit losses, though a good chunk of the capital markets’ upside came from large, one-off deals that may be tough to repeat.
We remain constructive on preferred securities. We continue to prefer $1,000-par institutional preferreds given stronger structures, better technicals and more attractive relative value. That said, the continued sell-off in $25-par retail securities has created more interesting valuations and selective opportunities.
