Preferreds Offer Yield Spreads Similar To Speculative-Grade Debt
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View from the Observation Deck

  1. The chart provides a comprehensive snapshot of how preferreds have fared over the past five years. The period captures the start of the financial crisis through 4/30/12.
  2. Over 80% of publicly traded preferred securities are issued by financial institutions.
  3. Prior to the financial crisis, preferred securities have historically offered investors a yield spread of 100-250 basis points over the benchmark 10-Yr. T-Note (see yields from 4/30/07). That spread was 493 basis points on 4/30/12.    
  4. The Merrill Lynch U.S. Preferred Stock Fixed Rate Index carries a BBB2 credit rating (investment-grade), yet its yield spread (493 bps over 10-Yr. T-Note) more closely resembles that of speculative-grade debt.
  5. The Merrill Lynch U.S. High Yield Master II Index carries a B1 rating (speculative-grade) and has a yield spread of 567 basis points over the 10-Yr. T-Note.
  6. While the recovery in the financial sector continues to be a slow and arduous process, preferred securities, in our opinion, offer investors seeking current income an intriguing alternative in today's climate.
Posted on Thursday, May 3, 2012 @ 5:09 PM

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.