Quick shot: Preference matters in preferreds right now
Thursday brought a quieter day for investors following a heavy week of bank-related headlines.
Thursday brought a quieter day for investors following a heavy week of bank-related headlines. The current environment is offering a reminder that while many businesses may struggle from time to time, when those businesses are banks, it tends to feel a lot worse.
Amid the buzz, investors have been highly focused on the outlook for preferred equities. Why?
Firstly, if you’re unfamiliar with the asset class, “preferreds” are hybrid instruments with both equity and bond-like characteristics. Like common stock, preferreds represent an equity interest in a company. Like bonds, they also generate income, but typically have a higher yield. Often, they offer the potential for high single-digit to low double-digit returns while sitting in between bonds and common stock in the capital structure. In other words, you could get paid more than you otherwise would in a bond issued by the same company, while being in front of common stockholders in the event the company goes under.
Crucially, though, they’re typically issued by quality financial and insurance companies.
Despite this, we still think some parts of the preferreds market look attractive. But not all of them – like any other asset class, selectivity is key. We’re focused on the preferreds issued by systemically important, or typically large, banks with flush capital rather than those issued by smaller, regional banks right now.
All market data from Bloomberg Finance L.P., 3/16/23
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