Primer on preferred securities

September 1, 2018

Preferreds offer investors higher yields than many alternatives. Preferreds are utilized in portfolio strategies to bolster yields while long-end rates remain low.

The primary market for preferreds has shrunk in recent years as new regulation and fears of rising interest rates have caused fewer companies to pursue issuance in such a portion of the capital structure.

In recent years, investors have been using preferreds to pick up additional yield versus alternatives. When the Fed began its rate “lift-off” for the short end of the yield curve in December 2015, such an action did not beget higher rates on the long end, but rather a flatter yield curve that has flattened further today. This potential for a lower for longer rate environment may translate to additional benefits for owning preferreds versus alternatives. Even so, investors would do well to assess the potential interest rate risk of preferreds over alternatives. Some of the negative effects of interest rate movements could be offset partially by benefits from credit quality improvements for traditional issuers of preferreds (i.e. banks).

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