Bond Market Update: Preferreds Face Headwinds as Credit Spreads Hit 5-Year Lows

New York City, NY – The preferred stock and baby bond market experienced fluctuations during the past week as Treasury yields rose. Despite this, many sub-sectors are showing gains for the month overall. This update, covering the fourth week of May, delves into individual market movements while also providing a broader overview.

Market commentary indicates that preferreds credit spreads are currently near 5-year lows, impacting the attractiveness of the asset class for new capital allocations. Issuance in both preferreds and baby bonds remains robust for various reasons, including refinancing of unfavorable coupon profiles and the creation of additional space for leverage through new offerings.

One notable addition to the market is the 9.5% 2029 baby bond from mortgage REIT MITT, which has started trading with yields close to 9.6%. Despite facing challenges during the COVID period, MITT has since deleveraged and reduced risk, though its higher-risk profile is reflected in its bond yields.

Notably, mortgage REITs like MITT are not subject to the 1940 Investment Act, which poses both advantages and vulnerabilities due to the nature of their leverage. Another recent addition is the baby bond TRINZ from BDC Trinity Capital, offering a 7.6% yield that is competitive within the sector. Options with yields exceeding 8% include MFICL, HTFC, PFXNZ, and OXSQG.

Additionally, the preferred from FTAI Aviation – a company specializing in aviation assets – has been performing well, with the highest yield at 9.7% among its suite of preferreds. An important point to note is that FTAI common and preferreds are treated as PFIC’s for tax purposes, which can have implications for investors.

Overall, the preferred stock and baby bond market continue to exhibit resilience and offer diverse opportunities for investors, with various factors influencing market dynamics and investment decisions. Investors are advised to stay informed about developments in the market to make well-informed decisions in this complex landscape.