Yellen comments, data point to rising odds of interest rate hike; preferred market gyrates

By Stephanie N. Rotondo

Seattle, Feb. 15 – Preferred stocks were mildly better on Wednesday, though the space was weaker at mid-morning.

One trader attributed the initial softness to “follow-through after [Federal Reserve chairman Janet] Yellen’s comments yesterday.”

On Tuesday, Yellen spoke to the Senate Banking Committee and indicated that it would be better for the central bank to act quickly on interest rates, though with caution.

A slurry of economic data – including the latest inflation numbers – seemed to point toward the increasing possibility that rates could move up as soon as March. Specifically, inflation figures rose above the Fed’s 2% target range last month at 2.3%.

“We’ll most likely see a rate hike because of that, maybe sooner than later,” a trader said.

Still, there remained a fair bit of uncertainty in the market, as investors “wait and see” what Steven Mnuchin, the newly confirmed Treasury Secretary, would do. The new administration’s talk of a new tax plan also has players wondering what will come next, the trader said.

Another market source noted that “volume remains light,” given that “there is a lot of uncertainty out there” – not just about the Fed, but also about the current administration’s fiscal policy plans.

The Wells Fargo Hybrid and Preferred Securities index closed up 10 basis points, after being off 11 bps at mid-morning. The U.S. iShares Preferred Stock index was unchanged to slightly lower in early dealings but ended 12 bps higher.

The primary market continued to be silent on Wednesday, but a trader commented that “we could see a deal launch tomorrow.”

He was not sure where that deal would be coming from.

The trader also noted that he was hearing talk of as many as three deals for next week, which are all expected to be at least $150 million and rated high yield.

The market continued to wait for Medley LLC’s $28.75 million add-on offering to its 7.25% $25-pat notes due 2024 (NYSE: MDLQ), a deal that was announced Monday.

The notes ended the midweek session at $25.21, down a nickel.

Meanwhile, a source said that GSE preferreds “tend to be the most actively traded still.”

“Right or wrong, that’s another story,” the source said.

Fannie Mae and Freddie Mac preferreds were not only active but continued to be better.

Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) ticked up 7 cents to $10.88 on more than 2.3 million shares traded.

Freddie’s 8.375% fixed-to-floating rate noncumulative preferreds (OTCBB: FMCKJ), however, were not as active as Fannie, though they still managed to make the day’s most active list, with almost 407,000 shares being exchanged.

The issue improved 11 cents, or 1.07%, to $10.39.

Morgan Stanley & Co. Inc.’s 5.85% series K fixed-to-floating rate noncumulative preferreds (NYSE: MSPrK) also remained busy, rising a penny to $25.60.

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