Preferred stock sell-off continues despite broader market rally; Medley still a no-show

By Stephanie N. Rotondo

Seattle, Dec. 14 – Despite a rally in the broader markets, the preferred stock market’s recent rout continued into Monday trading.

“There was a lot of red out there in the market today,” a market source said. The source noted that the weakness “probably” had something to do with the Federal Reserve’s upcoming meeting on Wednesday, in which the central bank is expected to raise interest rates – finally.

But the source also pointed to broader “problems in the high-yield market” as a possible reason for the declines.

The Wells Fargo Hybrid and Preferred Securities index ended down 1.65% on the day. The index was off 46 basis points at mid-morning.

Still, the source said preferreds “slightly outperformed” long Treasuries.

Also weighing on the market was oil prices. Initially, domestic crude prices were way off, falling over 1% to trade at $35.23 a barrel for January delivery. However, the commodity rebounded by day’s end to trade north of $36 on speculation the sell-off had been overdone.

“Oil names are all getting hammered,” a trader said early in the day, adding that the pressure was starting to “bleed through to everything else.

“Risk-off, risk-off,” he quipped.

Given the recent declines in the market, a trader said he was “waiting to hear what they are going to do with that Medley Capital [Corp.] deal.”

The New York-based business development company said Thursday that it was selling $25-par notes due 2021 via Keefe Bruyette & Woods Inc., Deutsche Bank Securities Inc., Sandler O’Neill & Partners LP and Janney Montgomery Scott LLC. Pricing was expected on Friday, but the deal was a no-show.

The trader remarked that he thought the deal would go through, unlike Cherry Hill Mortgage Investment Corp.’s proposed $50 million offering of series A cumulative redeemable preferreds, which was pulled on Tuesday.

But the fact that there has been no word on the new issue was “odd,” he said.

Fannie, Freddie fall

Fannie Mae and Freddie Mac paper continued to drop on Monday, “probably on some chatter about a bill in the Senate that would basically force the Treasury to hold them in conservatorship” barring congressional approval.

“Old news,” the source said, as the bill has been a topic of conversation for several months now.

Both Fannie’s 8.25% series S fixed-to-floating rate noncumulative perpetual preferreds (OTCBB: FNMAS) and Freddie’s 8.375% fixed-to-floating rate noncumulative perpetual preferreds (OTCBB: FMCKJ) declined 20 cents, or 5.41%, to $3.50.

In mid-September, U.S. senators Bob Corker (R-Tenn.), Mark Warner (D-Va.), David Vitter (R-La.) and Elizabeth Warren (D-Mass.), all members of the Senate Banking, Housing and Urban Affairs Committee, reintroduced the “Jumpstart GSE Reform Act.” The bill would prohibit any increase in the guarantee fee from offsetting other government spending while also prohibiting the sale of Treasury-owned senior preferred shares in Fannie and Freddie without congressional approval and significant housing finance reform.

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