TSX ETF Investor Centre
4 Reasons to Own U.S. Preferred Shares Now
U.S. preferred shares sold off in Q1 2023 amid investor nervousness about deposit liquidity concerns at several U.S. regional banks (Silicon Valley Bank, Signature Bank, First Republic Bank) and Credit Suisse, a major Swiss bank. While well-capitalized by regulatory standards, these banks were unable to meet liquidity demands related to a classic run-on-the-bank, and regulators brokered a forced sale of these institutions to stronger banks.
For U.S. bank depositors, unrealized losses in investment and loan portfolios was the primary concern that led to deposit flight. These unrealized losses were almost entirely due to higher interest rates reducing the prices of U.S. Treasuries and related securities that make up the bulk of banks’ investment portfolios. The more severe asset-liability mismatches have been bank-specific and, in our view, do not represent a threat to the overall 5,000-member global banking system.
Q2 2023 earnings, reported in July, showed that earnings were in line with analyst expectations. Capital ratios remained strong and regional banks especially have generally been successful in attracting or retaining deposits. Non-interest-bearing deposits are down, in most cases replaced by more expensive interest bearing deposits, a more costly source of bank funding. Investors were generally reassured by Q2 results and U.S. bank stocks staged a minor rally after earnings season.
U.S. Preferred Shares – An Attractive Income Opportunity in Volatile Markets
Rapid rate increases in 2022 led to substantial price declines broadly across fixed-income asset classes including U.S. preferred shares. The Manager believes the current yield and price level of U.S. preferred shares offer an opportunity for investors to lock-in an attractive level of income with long term capital appreciation potential.
U.S. Preferreds: Higher Income Opportunities
Fixed income securities have been under pressure in 2022 from several fronts: rapidly increasing interest rates, higher inflation, global uncertainty in (what we hope is) the tail-end of the COVID-19 pandemic and topping it off, the Russia-Ukraine war. Despite all this, there is some good news for investors: yields in some pockets of the fixed-income space have now increased to the point where meaningful income is available, especially in coupon-rich segments like U.S. Preferreds. To illustrate, we highlight the features of a pair of adjustable U.S. Preferred issues from two major financial services issuers: one recent, and one completed several months ago.