This review delves into the weekly market movements of preferred stocks and baby bonds, focusing on the third week of March. It highlights a period of unfavorable returns for preferred securities, primarily due to an increase in both Treasury yields and credit spreads, pushing overall yields to levels not seen since early 2024. The analysis also scrutinizes recent Collateralized Loan Obligation (CLO) Closed-End Fund (CEF) preferred issuances and specific bond offerings, assessing their implications for investors.
During the third week of March, the market for preferred stocks experienced a downturn, characterized by negative returns. This decline was largely a consequence of rising Treasury yields and expanding credit spreads. These macroeconomic factors combined to elevate preferred yields to their highest points since the beginning of the year, signaling a more challenging environment for these income-generating assets. Investors observed that newly issued CLO CEF preferred shares, such as OXLCM with an 8.25% yield, offered a surprisingly limited yield premium compared to traditional bonds, despite the inherent higher subordination risk associated with such instruments. This disparity raises questions about the risk-reward balance for investors considering these newer offerings.
A notable discussion point was Kemper's KMPB junior subordinated bond. This bond presents an intriguing scenario with a potential yield reset to 9.1% in 2027. However, market sentiment indicates a degree of skepticism regarding the likelihood of this bond being redeemed, which could significantly impact its future value and appeal. Furthermore, the ARES.PR.B mandatory convertible preferred stock was analyzed for its unique structure. Its valuation is intrinsically linked to the performance of ARES common stock, making it a suitable investment primarily for those who hold a positive outlook on the underlying common shares. This ties the preferred stock's fortunes directly to the equity market's perception of ARES, distinguishing it from more yield-focused preferred instruments.
In summary, the market faced headwinds from rising yields and widening spreads, impacting preferred stock performance negatively. New CLO CEF preferreds offered limited yield advantages relative to their risk, while Kemper's junior subordinated bond and ARES's convertible preferred presented distinct risk-return profiles tied to future events and underlying equity performance, respectively.