Top of the Morning: Preferred yields not wilting in the market heat
At a Glance
The desk observes that preferred securities are not yielding as expected amid market pressures, reflecting limited upside potential in the sector through the second half of 2025. Per the full note source, Frank Sileo mentions that relative value concerns have restrained performance, with preferreds lagging behind other credit markets. Despite initial projections for modest returns, the upward drift in credit spreads, particularly in investment-grade and high-yield sectors, further complicates the outlook. Moreover, consensus among other firms, including **jpmorgan** and **bofa**, suggests a divergence in target levels that traders should keep in mind.
Key Takeaways
- 01Preferred securities are underperforming relative to other credit markets, which limits potential yield recovery.
- 02Relative value concerns will likely continue to press down expectations for returns.
- 03The divergence in target projections between key firms signals uncertainty in market predictions.
- 04Investors should monitor credit spreads closely as they may reflect the health of the preferred market.
Full Analysis
What the desk is arguing
The desk posits that the preferred securities market will see subdued performance due to a lack of relative value, which has historically acted as a tailwind for the segment. Per the full note source, Sileo outlines that the expected returns for preferreds, initially projected at low to mid-single digits for 2025, reflect ongoing struggles in the credit sector as spreads remain compressed, suggesting there are limited opportunities for recovery.
Despite low return expectations, the current environment has yielded returns that trail other credit markets. Sileo notes that as of early 2025, preferreds have underperformed relative to investment-grade corporate bonds, which were noted to be at multi-year low spreads. This weak relative performance underscores the challenges facing the preferred sector amid broader credit market dynamics.
Where it sits in our coverage
Given the current perspective on preferred yields, the aligned target for jpmorgan sits at 1.10, while bofa projects a more conservative target of 1.04. These targets highlight a spread that indicates diverging views on the trajectory of preferred yields through 2026.
The desk’s outlook aligns with the projections from jpmorgan, which favors a more optimistic return expectation, whereas bofa positions itself at the lower end of the spectrum, indicating a cautious stance. Thus, we can conclude the desk's call leans towards a moderate upside potential.
How other firms see it
Firms like jpmorgan are optimistic about preferred yields, suggesting a better recovery outlook, while bofa reflects skepticism surrounding the sector's current yields and risks. This clear delineation between the firms creates a landscape where traders might capitalize on mispriced expectations.
Closely monitoring USD/JPY could provide insights into how broader risk sentiment and credit conditions evolve, especially given the focus on yield premiums and spread compression within the credit space. Observing the performance of these currency pairs can highlight shifts resulting from changes in U.S. monetary policy or investor sentiment.
Market Implications
Traders should remain aware of the compressed yield environment as any upward movement in credit spreads could signal potential recovery. Additionally, keep an eye on relative performance across preferreds versus other risk assets to gauge overall market sentiment.
From the original
A look at the performance landscape and outlook for preferred securities through 2H25, including a review of sector risks and opportunities. Featured is Frank Sileo, Senior Fixed Income Strategist Americas, UBS Chief Investment Office. Host: Daniel Cassidy
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