November Update: Preferred Stock Strategist
* Preferreds sell off in October:
Prices of fixed-rate preferreds fell for the fourth consecutive month
against a backdrop of steadily higher bond yields. Although prices
were uniformly lower last month, preferreds with shorter call
protection periods managed to remain at or above par-thereby
outperforming longer duration preferreds.
* Retain full underweight:
We continue to recommend a full underweight within the preferred
market. Expensive valuations and the current interest rate outlook
represent the primary risks to performance, in our view. Given this
environment, we recommend upgrading credit quality, shorter call
protection preferreds, tax-advantaged preferreds, and floaters.
* Floating-rate preferreds:
Given the outlook for sustained Fed tightening through January, we
continue to recommend floating-rate preferreds. This sector of the
preferred market offers the potential for higher coupon income and low
interest rate risk. In addition, the majority of floating-rate
preferreds distribute tax-advantaged income.
* Rating changes:
This month we reclassified our coverage of ONE V, D A, DRE I, GMA, HLI
B, HI F, HRP A, and PCE A now that these securities are approaching
their first call date.
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