Preferreds sell off amid China, global fears; spreads widen to near-2008 levels; RBS plunges

By Stephanie N. Rotondo

Phoenix, June 24 - Preferred stocks were "getting smashed" on Monday, a trader said, as China said a liquidity issue facing its banks will not be helped by the government.

"Everyone is worried about a global retreat," the trader said, noting that spreads of preferreds versus Treasuries were "almost wider" than they were in 2008 during the financial crisis.

"So it's kind of odd," he said. In these situations, when investors are looking for safe ports to ride out the storm, they usually put their money into Treasuries, he said.

"But we're not seeing that," he said.

That begs the question: Where is that money going? The trader speculated that with all the recent ETF outflows, perhaps managers and other investors are simply sitting on their cash, waiting for the new quarter to start July 1.

Regardless, the trader said that the preferred market was "clearly oversold," in his opinion.

"Obviously, things are ugly still," said one desk analyst.

The Wells Fargo Hybrid and Preferred Securities index (NYSE: WHPSF) dropped more than 100 basis points during Monday's session, leaving it at 1,510.65. A market source said that the last time the reading was lower was November 2012.

"So all the gains [since the beginning of the run-up in January] have evaporated at this point," he said. "On the positive side, that means there is a lot more value in the market."

Still, he speculated that things will "get worse before they get better."

A look forward through the week indicated that there will continue to be a lack of new issues in the market.

"I am 99.9% sure there will be no deals this week," a trader said, aside from a planned offering of $25-par notes due 2020 from Full Circle Capital Corp.

That deal is expected to price Tuesday. It was originally announced May 2.

RBS gets beat down

Royal Bank of Scotland Group plc paper suffered in Monday trading.

The 5.9% noncumulative guaranteed trust preferred securities (NYSE: RBSPE) dropped 93 cents, or 4.49%, to $19.76, while the 7.25% series T noncumulative dollar preference shares (NYSE: RBSPT) declined 97 cents, or 4.25%, to $21.83.

The 6.08% noncumulative guaranteed trust preferreds (NYSE: RBSPG) lost 92 cents, or 4.37%, ending at $20.14.

Last week, U.K. bank regulators said that several U.K.-based banks - including RBS - needed to raise more capital to ensure stability. That news came on the heels of word that Stephen Hester, RBS' chief executive officer, will leave his post at the end of the year.

Chatter is that Hester was pressured to put forth his resignation, as he wanted to go slow with the re-privatization efforts of the bank, which is 82% controlled by the government. But regulators are reportedly wanting to divest that stake sooner rather than later.

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