Market digesting data, pace of rate hikes; GSE preferreds decline on Mnuchin comments

By Stephanie N. Rotondo

Seattle, Jan. 19 – Preferred stocks were selling off on Thursday as investors were keeping their eyes on a variety of headlines.

The Wells Fargo Hybrid and Preferred Securities index declined 84 basis points. The iShares U.S. Preferred index was meantime down 89 bps.

The confirmation hearing for Donald Trump’s Treasury Secretary pick, Steven Mnuchin, began in the early hours of the day. The market was interested in that outcome, especially as it pertains to GSEs and housing reform, a trader said.

During his testimony, Mnuchin indicated he was against any plan that involved recapitalizing and releasing Fannie Mae and Freddie Mac, driving down the preferreds.

The market was also digesting fresh housing data that was “strong,” according to the trader, and an unemployment number that was the lowest seen in 43 years. The data appeared to back up Janet Yellen’s comments from Wednesday, in which the Federal Reserve chairman indicated that the time was ripe for continued gradual interest rate increases.

A market source also noted that concerns about inflation – which bumped up above 2% for the first time in several years – were driving the losses.

In other news, KeyCorp reported results that topped analysts’ expectations. However, given the overall tone of the market, the bank’s preferreds were in decline.

Fannie, Freddie drop

Fannie and Freddie preferreds were traded actively on Thursday and pushed lower as investors reacted negatively to comments made by Treasury Secretary nominee Mnuchin.

Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) waned 2 cents to $8.14, while Freddie’s 8.375% fixed-to-floating rate noncumulative preferreds (OTCBB: FMCKJ) dropped 19 cents, or 2.49%, to $7.45.

Back in November, Mnuchin, a former Goldman Sachs banker that president-elect Trump has tapped to head the Treasury, said the incoming administration intended to work quickly on housing reform, though he did not give any hints as to how the GSEs would be dealt with. Still, the comments made investors optimistic and the GSE-linked preferreds – as well as the common equity – started to climb higher.

But during his testimony during a confirmation hearing, Mnuchin said any plan involving the GSEs should not include recapitalizing the agencies and then releasing them from government control.

“There should never be recap and release,” he said.

Still, Mnuchin did remark that he hoped to find a bi-partisan plan to fix the housing issue.

KeyCorp beats estimates

KeyCorp’s 6.125% series E fixed-to-floating rate noncumulative preferreds (NYSE: KEYPrI) lost ground on Thursday, even as the Cleveland-based bank reported fourth-quarter earnings that beat expectations.

The preferreds declined 34 cents, or 1.28%, to $26.25.

For the quarter, KeyCorp reported net income of $209 million, or 19 cents per share. On an adjusted basis, EPS was 31 cents.

Revenue was $1.68 billion.

Analysts polled by Zacks Investment Research had predicted EPS of 29 cents on revenue of $1.45 billion.

For the year, net income was $754 million, or 80 cents per share. Revenue was $4.99 billion.

Recent deals trade

Among recently priced deals, Pennsylvania Real Estate Investment Trust’s $150 million offering of 7.2% series C cumulative redeemable preferreds were seen at $24.90 bid, $24.97 offered.

The non-rated deal came Wednesday, upsized from $75 million and tight to the 7.375% area price talk.

Wells Fargo Securities LLC, Citigroup Global Markets Inc., Jefferies, J.P. Morgan Securities LLC and Stifel Nicolaus & Co. Inc. ran the books.

Meanwhile, Medley LLC’s 7.25% $25-par notes due 2024 were pegged at $24.80.

The company initially sold $30 million of the notes on Jan. 13. On Wednesday, it was reported that the $4.5 million greenshoe had been fully exercised, bringing the total amount outstanding to $34.5 million.

FBR Capital Markets, Incapital, BB&T Capital Markets, Compass Point, Ladenburg Thalmann & Co. Inc., William Blair and JonesTrading were the joint bookrunners.

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