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Treasury yields have retreated, and that’s good news for one kind of income asset – preferred securities, according to UBS. Preferreds have qualities that are like both stocks and bonds. They trade on exchanges like equities, and offer a stream of income that’s like fixed-income investments. Like bonds, rising Treasury rates hurt preferreds’ market value due to their higher yields. The runup in bond yields through late summer and early fall led to the rate on the 10-year Treasury note topping 5% in October. “The recent surge in rates led to three straight monthly losses for the preferred securities sector,” said Frank Sileo, senior fixed income strategist for the Americas at UBS. US10Y YTD line U.S. 10-year Treasury yield in 2023 This month has offered some relief as the 10-year Treasury yield slipped back below 4.5%. “Indeed, a dramatic rate pullback in the early days of November has already sparked a sharp rebound in preferreds,” Sileo said. Preferred shares may offer attractive income, but they have a unique set of characteristics. For instance, many of them are callable, meaning the issuing company can redeem them. These assets also depend greatly on the financial strength of the issuing company. Many preferreds are rated by credit monitoring agencies, such as Standard & Poor’s and Moody’s Investors Service. Finally, financial services companies are notable issuers of preferreds, accounting for the vast majority. That means if you stock up on these offerings, you’re also likely ramping up exposure to banks and insurance companies – and that could change the risk profile of your portfolio. Finding an income play UBS highlighted its top picks among preferred securities in an investor note on Monday. Preferred shares from Allstate were among the firm’s picks for conservative portfolios. “Attractive,” Sileo wrote. “Callable in July 2028, this fixed-for-life perpetual pays a high 7.375% fixed coupon and offers an attractive [yield to call/current yield].” A “moderate” portfolio recommendation from UBS was a Brighthouse Financial preferred that pays a 6.75% coupon. “This fixed-for-life perpetual preferred offers a high coupon and call protection until June 2025,” wrote Sileo. “Trades at a discount.” More aggressive strategies include a preferred offering from Triton International, a container leasing company that was recently bought out but whose preferred still trades and offers an 8% coupon and is callable next September. “Attractive,” Sileo wrote of the Triton preferreds. “This high coupon preferred has call protection until September 2024. Investors can receive an attractive yield on a high-quality crossover credit, recently upgraded by S & P following the acquisition by Brookfield [Infrastructure].” — CNBC’s Michael Bloom contributed reporting.
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