Fixed Income: Little Value in Treasuries, Preferred Financials Yielding 8%

Credit markets have remained largely range-bound. The 10-year Treasury yield, trapped between the opposing forces of a weak economy and massive inflationary measures by the government, has fluctuated within a relatively narrow range of 3.75% to 4.25% since the beginning of May.

Treasuries may remain range-bound while economic weakness persists, but our assumption is that the longer-term trend is in the direction of higher yields. Given the inflation backdrop, Treasuries offer very little value at present yield levels, and supply/demand fundamentals are deteriorating due to rising federal budget deficits and liabilities.

• The 9.8% yield available from the SPDR Lehman High Yield ETF (JNK) is attractive on a relative basis, but conservative investors seeking income may want to wait to see if higher yields develop as defaults rise. Historically, absolute yields in excess of 10% have been an effective threshold for the high yield asset class to be considered attractively valued and for investors to be adequately compensated for the risk inherent in junk bonds.

• Investors willing to attempt a little bargain hunting in the financial sector may be interested in the PowerShares Financial Preferred ETF (PGF), which holds a portfolio of 42 preferred stocks issued by large financial firms (for fund details, see bottom table). The top holdings in the fund are preferred stocks issued by ING, Metlife, HSBC, Royal Bank of Scotland and Credit Suisse. The attraction of the fund is its 8% current dividend yield, 100% of which qualifies for the 15% rate on stock dividends.

Click to enlarge tables:

 

Comments

[ggillin:]

Thank you.
A nice short, concise article.
I would not consider buying the particular issue you wrote about but I liked the info, especially the included credit quality ratings.
[e-mail]

2008 Aug 08 08:46 AM

[Fabien Hug:]

Thank you good and practical info. Effectively for those who roll over CD's every 3 months, why not put some into PGF.

2008 Aug 08 09:02 AM

[adan:]

interesting article, but way too much risk for me, even at these spreads - sorry

2008 Aug 08 09:05 AM

[22thoroughbred:]

I have been building a portfolio of financial preferreds for about 3 months, the avg. cost in my portfolio is just under $17 and all were issued at $25, the yield on the portfolio at my cost is 9.97%, I allocate a specific dollar amount into each name, if I have 2 defaults my cost basis (assuming I sell 2 positions at zero) would be $19.02.

2008 Aug 08 10:24 AM

[Larry House:]

Corporate bonds offer a decent alternative--higher yields than Treasuries, less risk than high-yield bonds. Seven percent is pretty easy to get with A-rated bonds.

2008 Aug 08 10:25 AM

[Jon G:]

Also look at HPF and PFO - 2 closed end funds that do nothing but pfd stocks....better yields and you get "active" management

2008 Aug 08 11:34 AM

[Larry House:]

The expense ratio for PFO is 1.56%! Ouch!

2008 Aug 08 01:35 PM

[notsosmart:]

better but far from good.as per info on this site the inflation rate of the 5 daily basic needs is app. 15-16%.so if you are working & not a ceo or hedgefund manager you better get a17-18% increase just to stay even.

2008 Aug 08 03:23 PM

[jakedeez:]

I held over 12 financial pfds this year going into July, I felt like they were a better place to hide then most financial equities. They day after I got scared and liquidated in my last financial equity (GS) at 164 I realized I was wrong. I took a hard look at my positions, I closed all but two of my pfds and switched into bank stocks... mostly USB, BAC, and on a lark I bought some WB. I am still holding them, although I have traded WB back and forth once. For PFDs? I have taken what was an average position size of about 1% of my portfolio and liquidated most of them to buy the equities... I have also however boosted 2 particular PFDs into top ten holdings.

2008 Aug 09 01:03 PM

[jakedeez:]

WPK is my number four holding (3.02%) after GE (10.45%), money market (7.33%), a Jan09 4.5% CD (6.79%) and FCX (3.32%) After that is BRKB 2.71%, CTEW 2.29%, KO 2.16%, DD 1.6%, USB 1.55%, and then DTT the other pfd I still hold at 1.53%

2008 Aug 09 01:06 PM

[Chemist29:]

so remind me why anyone would not do a simple etf like TIPS which is AAA instead of something with less yield?

2008 Aug 10 10:59 PM

[oldman:]

thoroughbred, do you have GJM- GMAC preferred around 11.75, yielding 16%? Are they going away?

2008 Aug 11 10:06 AM

[22thoroughbred:]

Dunn, I had both the GM pfd as well as the F pfd, I just have zero confidence in either, and beside that, those 2 have gotten many recommendations as a better place to hide if you want long term exposure to GM and F so I think there are many novice investors there, if it starts to drop I don't believe they will hold for the long term and would make the drop much worse than it would need to be. Does that make sense?

2008 Aug 18 10:09 AM

[CrossProfit_:]

thoroughbred,
Yes, it makes sense for now.

Also, nice article.

CrossProfit

2008 Aug 18 02:14 PM