President Trump's inaugural address did not discuss import tariffs. Markets reacted positively to the lack of immediate action on tariffs. However, later in the day, President Trump told reporters from the Oval Office that he was considering a 25% tariff on imports from Canada and Mexico on February 1. Later in the week, he suggested new China tariffs could be enacted on the same day. Stocks in major markets around the world continued to climb each day last week, excepting Mexico's stock market which registered a dip of just -0.06% on Tuesday (measured by the MSCI Mexico Index).
Preferred securities offer some of the highest yields in the fixed income universe today. That can be attractive for income-oriented, long-term investors, but the risk of higher long-term Treasury yields means that prices could fall modestly over the short run.
Preferred securities are a type of hybrid investment. The higher yields they currently offer can be a nice benefit for income-oriented investors, but those higher yields reflect the additional risks they face.
The outlook today is a bit mixed, as there are both benefits and risks to understand when considering preferreds. They can make sense for income-oriented investors, especially those in higher tax brackets, but their relatively slim yield advantage over investment-grade corporate bonds today makes them less attractive for more conservative investors.
Benefits:
Risks:
Preferred securities can offer many benefits for investors, especially those looking for income. These benefits include:
1. High yields. Preferred security yields remain near the high end of their 15-year trading range. The ICE BofA Fixed Rate Preferred Securities Index offered a yield-to-worst of more than 5.5% in mid-January 2025, up from less than 5% in September 2024. The recent move up on expectations of fewer expected Federal Reserve interest rate cuts this year.
There's no free lunch when it comes to investing, so investors should be cognizant of the risks involved with preferred security investing.
1. Low relative yields. Focusing on the yield alone doesn't tell the whole story. It's important to look at relative yields as well, and the yield advantage that preferreds offer over other similarly rated investments is low today. The average yield-to-maturity of the ICE BofA Fixed Rate Preferred Securities Index is roughly 6.5%. While that looks attractive on the surface, it's not much of an advantage over the 5.5% yield of the Bloomberg U.S. Corporate "BBB" Bond Index.1 The average credit rating of that preferred security index is in the mid "BBB" area, so comparing yields to BBB rated corporate bonds provides a more apples-to-apples comparison.
That approximately 100-basis-point yield advantage that preferreds offer relative to similarly rated corporate bonds is low considering it averaged roughly 200 basis points (or 2 percentage points) from 2010 through 2019. Prior to 2022, that yield advantage hadn't fallen below 100 basis points since the depths of the global financial crisis in 2009, but it has been hovering around that level for the past few years. Given that relatively small yield advantage, more conservative to moderate investors may want to consider investment-grade corporate bonds and the more than 5% average yields they offer rather than reaching for yield with preferreds today.
