Preferreds Hit Hard

Includes: AGG, PFF
by: Bespoke Investment Group

Asset classes that are sensitive to the movement in interest rates have struggled recently, and this includes preferred stocks. Tuesday we saw a curious divergence between preferreds and other fixed income products, however.

Preferred stocks generally move inline with the fixed income market, so yesterday morning when interest rates were up and bonds were down, the preferred stock ETF (NYSEARCA:PFF) was down as well. Throughout the day, though, bonds staged a rally as the equity market struggled, and the 10-Year Treasury Note along with the Aggregate Bond ETF (NYSEARCA:AGG) closed positive on the day. That wasn't the case with preferreds. As shown in the first chart below, PFF opened down and continued to fall to close at essentially its lows of the day.

Clearly preferreds did not bounce with the rest of the fixed income market, which is something to keep an eye on over the next few days for sure.