Outlook 2021: Preferred stocks expected to continue as safe harbor for upcoming year

By James McCandless

San Antonio, Dec. 31 – Despite taking a stumble at the onset of the coronavirus pandemic in March, the preferred stock market largely carried over the positive trend from the previous year into 2020.

The Wells Fargo Hybrid & Preferred Securities Financial index was on track to end the year on a high note, with the year-to-date return sitting at 5.59% in the middle of December.

The iShares U.S. Preferred Stock ETF was ahead with a 6.15% year-to-date positive change.

The Invesco Preferred ETF was more subdued, just barely in the black by 0.26% in the year-to-date range.

The preferred market continues to be widely seen as a relatively safe fixed-income investment during periods of market turmoil.

Heading into 2021, the Wells Fargo Investment Institute again featured preferred securities on its list of favored sectors for the new year.

In a note, analysts said that while they continue to view the asset class favorably, buyers might want to have a “buy-and-hold mentality, as these securities can become highly volatile during times of market stress.”

Outlining the market in a November note, Charles Schwab analyst Collin Martin said that the preferred market correlated more with the common stock market than the bond market, which could drive 2021 preferred performance.

“Investors may still hold preferred securities because of the high income payments they offer, but make sure you have a long investing horizon and be prepared for potential price volatility,” Martin said.

Preferreds sustain gain

Leading into 2020, the preferred stock market was sustaining a positive trend as Federal Reserve interest rates, which are closely tied to the preferred market, were pegged at 1.50%.

The Fed was steadfast in that rate until the onset of the pandemic in March, when the body decided to cut the rate to a range of 1% to 1.25% and then subsequently slashed it to a range of 0 to 0.25%.

Since the action, the effective Federal Funds rate has oscillated between 0.05% and 0.10% with no raise in sight as the economy remains strained.

The iShares U.S. Preferred Stock ETF had been straddling the 38 context at the beginning of March, hitting a floor at $25.12 before jumping back up into the 30’s shortly after.

The index is on track to return to pre-pandemic levels by the end of 2020.

“There is more risk in getting into the space right now because of the high prices,” a market source said. “There’s also nowhere to go but up with interest rates, which isn’t ideal. But as long as sellers take advantage of the favorability there will be buyers.”

New issuance better

New preferred stock issuance toward the end of the year joined the market’s wave of improvements.

Bank of America Corp.’s 4.375% series NN perpetual non-cumulative preferred stock, priced at the end of October, quickly rose above its par value.

As of Dec. 11, the preferreds (NYSE: BACPrO) closed at $26.08.

The New York-based banking giant issued $2.2 billion in preferred securities this year in a pair of deals.

Also in finance, Cullen/Frost Bankers, Inc. priced a $150 million offering of 4.45% series B non-cumulative perpetual preferreds.

Out of the gate in mid-November, the tranche pushed above par, landing in the $25.50 context by the end of Dec. 11.

Elsewhere, real estate investment trust Public Storage was prolific this year, tapping the market four times for a collective $1.1 billion in paper.

Most recently, the company’s Nov. 9 $150 million pricing of its 3.9% cumulative preferred shares were following the prevailing trend, holding at $25.39 in the middle of December.

© 2015 Prospect News.
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