Outlook 2019: Preferreds set for gains in new year; floaters, high-yield municipals eyed

By James McCandless

San Antonio, Dec. 31 – After a year of losses, preferred stocks appear to be poised for improvement in 2019, market sources said.

The iShares U.S. Preferred Stock ETF saw a year-to-date loss of more than 4%.

The Wells Fargo Hybrid & Preferred Securities Financial index was operating at a 2.23% year-to-date loss in the middle of December.

The Invesco Preferred ETF was spotted netting a 3.9% year-to-date loss.

But as 2019 approached, preferred securities – an asset class that is often seen as a mix of common stock and bonds – were beginning to generate interest from across the market as a stable form of income in an economy poised for a potential slowdown.

“In 2008 the preferred universe was mostly made up of securities from some of the weakest U.S. banks,” Fidelity manager Adam Kramer said in a note. “Now it's almost entirely composed of the strongest, highest-quality U.S. banks.”

Kramer also said that he favors preferred securities, especially floating-rate securities in the current interest rate environment, trading under par that have the option to be called at par.

The Wells Fargo Investment Institute listed preferred securities as one of its top sectors for 2019, also favoring the income potential.

“We have a favorable view on preferred securities, given their upside price return potential and think high yield municipal bonds are likely to outperform their taxable equivalents given a steeper municipal yield curve and a continued decline in municipal bond issuance,” Nuveen Asset Management, LLC analysts said in a note.

Once again, the space remained dominated by the financial sector as 52.8% of the issuance base, according to Nuveen, followed by insurance, industrials, utilities and real estate investment trusts.

Preferreds see late fall

The preferred market was on track to be net positive for the year, switching tracks when the Federal Reserve raised interest rates from 1.95% to 2.19% and eventually 2.20%.

The U.S. 10-Year Treasury Yield, considered a benchmark in preferred stock pricing, was also spiking at 3.2%.

The Wells Fargo Hybrid & Preferred Securities Financial index followed suit with a three-month rate of return at negative 3.22%, effectively wiping away any gains made during the year.

Though Barry McAlinden, a senior credit strategist at UBS, told the Wall Street Journal that after the spike, yields will hold steady in 2019.

“We don’t think this yield will move meaningfully above its 2018 peak of 3.2% over the next year,” McAlinden said.

Newer issues eyed

Newer preferreds priced in the second half of the year were showing a mixed performance by December.

Hartford Financial Services Group, Inc.’s 6% series G non-cumulative perpetual preferred stock (NYSE: HIGPrG) was trading in the $25.30 context in the first week of December.

The Hartford, Conn.-based insurance provider priced an upsized $300 million of the $25-par preferreds on Oct. 30. The deal was originally offered at $200 million and came in at the low end of yield talk of 6% to 6.125%.

On Nov. 5, the deal was brought up to $345 million in a full exercise of its greenshoe.

Enstar Group Ltd.’s 7% series E perpetual non-cumulative preference shares (Nasdaq: ESGRO) were trading at $24.60 in early December.

The Bermuda-based reinsurer tapped the market for $110 million of the $25-par preferreds on Nov. 14.

The deal was upsized from $100 million and came at the low end of dividend talk of 7% to 7.125%.

In more recent new issue trading, NiSource Inc.’s 6.5% series B fixed-rate reset cumulative redeemable perpetual preferreds, trading under the temporary symbol “NISOP,” were down 6 cents in mid-December to $24.89.

The Merrillville, Ind.-based energy holdings name offered $500 million of the $25-par preferreds on Nov. 28, upsizing the deal from $200 million and matching talk of an initial 6.5% dividend.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.