Fannie, Freddie improve; ‘uncertainty,’ interest rates loom over preferred stock market

By Stephanie N. Rotondo

Seattle, Feb. 8 – Fannie Mae and Freddie Mac preferreds continued to be in focus on Wednesday.

However, while the GSE-linked preferreds did top trading, liquidity in the most-active paper – the Fannie Mae 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) and the Freddie Mac 8.375% fixed-to-floating rate noncumulative preferreds (OTCBB: FMCKJ) – was lower than usual, coming in well below the typical 1 million shares traded.

Fannie’s 8.25% preferreds gained 15 cents, or 1.49%, to end at $10.20, while Freddie’s 8.375% preferreds improved 21 cents, or 2.15%, to $9.96.

Morgan Stanley & Co. Inc.’s $1 billion of 5.85% series K fixed-to-floating rate noncumulative preferreds (NYSE: MSPrK) were also active, relatively speaking, trading up 6 cents to $25.49.

The day’s limited liquidity – particularly in the GSEs – seemed to back up a trader’s report that there was not a whole lot moving the market.

“I’m not hearing any new deals; nothing is moving,” he said.

The trader attributed the space’s subdued nature to “uncertainty” surrounding the Trump presidency, particularly how the administration might go after regulations.

Should the new administration “start tweaking” things like Dodd-Frank, “we might see banks returning capital,” in the form of raised dividends and such, the trader opined.

But until more clarity is offered, the preferred market will likely stay pretty stable, he said.

Interest rates are also keeping investors on the sidelines, as they wait to see how the Federal Reserve will act in the coming months. If rates start to go up, like expected, the trader said utilities and real estate investment trusts could start to issue more paper.

Public Storage, for instance, has several issues with coupons around 6% that become callable this year, the trader said. The company “could possibly get away with” issuing deals in a 5.25% to 5.5% range, the trader speculated. The question is, would that be enough savings for the company to start calling the older issues?

While it is possible, the trader said, only time will tell.

The Wells Fargo Hybrid and Preferred Securities index finished up 30 basis points. The U.S. iShares Preferred Stock index was up 63 bps.

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