Looking over accounts today it is difficult to not like the nice gains I have today—I don’t necessarily understand the market movement from a common sense perspective, but just the same I will take the gains.
In spite of the gains there are still plenty of baby bonds and preferred stocks falling today–some of them kind of hard–with fixed-to-floating rate issues acting a bit dicey.
One loser today is the Customers Bancorp Fixed to Floating rate 7% preferred (CUBI-C). This issue is off more than 3% to $22.33. Prior to the pandemic this issue was trading up near $26–way too high. The issue enters the ‘floating’ period on 6/15/2020—less than a month away. The issue will float at 3 month Libor (now .42%) plus a spread of 5.30% so today that would equate to 5.72%—1.28% below the current coupon–something has to give and in this case it is the price.
It is pretty likely that we are going to see quite a few of the fixed-to-floating rate issues remain outstanding in the future—unless we get some really spiking interest rates coupons will be heading lower.
BE CAREFUL–pricing on fixed to floating rate issues will react negatively to a lower reset in the coupon 2-4 quarters prior to the new reset occurring.
We would suggest double checking any fixed to floating rate preferreds you are holding. Our fixed-to-floating rate page shows the 1st call dates (which is also when rates begin to float) as well of the ‘potential coupon’. A large share of these issue would reset from 1-2% lower in coupon if they reset today.
Many of these fixed-to-floating rate issues have some time before they go to quarterly resets so everyone should make sure where their issue stands at least 1 year prior to the first coupon reset and then apply your best prediction to where interest rates might be at reset time so you can exit if necessary.