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Mutual fund manager, CFA, registered investment advisor, macro
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"I never say I have a preference for one medium as opposed to another." - Christine Baranski

I've continued to stress the idea in my writings that I believe 2012 to be a year of reflation similar to 2003 and 2009, whereby risk assets perform materially better than most think, coinciding with a rising yield environment for bonds. I've also made it a major point to stress that financials are a key component to the bull move higher given overall outperformance potential. While I have been recently noting that market internals were deteriorating somewhat and that the odds of a correction were rising, the recently announced stress test results and dividend/buyback news from JPMorgan (NYSE:JPM) may have reversed that completely. More time is needed to confirm, but there was a notable improvement in intermarket relationships following the news.

Yields did spike up and it looks like money is starting to believe the reflation story within the Treasury bond market. What is an income investor to do now that "risk-free" may actually become risky in a rising inflation expectations environment? Take a look below at the price ratio of the iShares S&P U.S. Preferred Stock Index Fund ETF (NYSEARCA:PFF) relative to the iShares 7-10 Year Treasury Bond ETF (NYSEARCA:IEF). As a reminder, a rising price ratio means the numerator/PFF is outperforming (up more/down less) the denominator/IEF.

Click to enlarge


I've annotated the chart to show the uptrend of outperformance that began at the start of 2012. Preferred stocks can be thought of as a hybrid of bonds and equities, and given that over 70% of the fund is exposed to banks, it would make some sense that the good news of the stress test results could benefit financials the sector more than the news benefits Treasuries the asset class. With a dividend yield over 6%, it might be a better income play with the caveat that it is heavily weighted in financials (which could be a good thing for now).

Source: Preferreds More Preferred Than Treasuries

Additional disclosure: This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.