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New Lows for Preferreds and Baby Bonds

It has been a rather ugly day and we have hit new lows in the average price of preferreds and baby bonds.

The average $25/share preferred and baby bond closed today at $22.20 which is 2 cents under the low average on 6/17/2022. You need to go back to 4/24/2020 to find a lower price (in early Covid).

This is painful–my accounts are pretty much where they were in June, even though I have garnered $1,000’s in dividends and interest. Off about 3-3.5% for the year.

As noted by many in the comments bunches of issues are hitting or near new lows–in particular the high quality low coupon issues–in the 3.9% to 4.75% range–Public Storage (PSA) has 2 low coupon issues trading in the 16’s—yikes!!

For now I am watching–add a little here and there. I have locked in some 6 and 9 month Tbills with some dry powder as well as a little bit of 1 year and 2 year notes–all up in the 3.7% to 4% area.

15 thoughts on “New Lows for Preferreds and Baby Bonds”

  1. iStar, Inc., 8.00% Series D Cumulative Redeemable Preferred Stock
    Ticker Symbol: STAR-D
    Hit year low $24.90 and now sitting near par.
    Hartford Financial Services Group, 6.00% Dep Shares Non-Cumul Prfrd Stock Ser G
    Ticker Symbol: HIG-G
    Might not trade under par too much longer.

    1. Surprised STAR-G is the same price as STAR-D. Interest rate risk and downside risk are bigger factors than call risk at this time.

      1. Martin – Why do you say that about interest rate risk vs call risk? I’ve not paid much attention this week, but as long as the STAR/SAFE merger is still to be completed on a timetable for this year, aren’t the preferreds all slated to be retired in conjunction with the merger? “Risk” might not be in the equation at these prices but call likelihood remains high, isn’t it?

  2. Tex, good points. Right now DJA is about 18% off it high in Nov. 21 do I think its a bottom? No.
    I think the Feds have this rate hike and at least one more to go before Dec. Before standing back to see the results. As for how much more pain ? well I don’t feel like I have seen the average Joe panicking yet. The layoffs I hear about like the Gap announced today of 500 + is a drop in the bucket. We still have the Reditt crowd that were moving the market less than a year ago with jobs making over 100,000 a yr. that haven’t felt the pain of layoffs.
    As for preferreds I would be worried about any company related to the building business. Mortgage, retail building stores, REITS, distribution like SRS, ABC, Beacon etc.
    Put me in for at least another 10% down. I have 1 bid in for a REIT preferred at par with 1 qtr. dividend built into the asking price. Other than that I am sitting tight on my FF preferred and 2 buyouts that have 80% institutional and mutual fund ownership waiting for the buyouts to close.

    1. Which two buyouts are those Charles?

      I am playing the Bluerock and SJI buyouts by various methods — not necessarily just the preferreds.

  3. I show 121 preferreds that were within 1% of their 2022 lows and 68 babys/terms. Too many to list here. What is interesting is that the median preferred was only down -0.41% and baby/term down -0.37%. If you only looked at that, you would NOT have guessed there would be that many new lows. The list has 14 PSA preferreds on it, so they are pretty good canaries.

    This brings up three questions in my mind:
    1) Will you keep buying, regardless if preferreds fall further?
    (Aka, I don’t care about capital losses as long as payouts seem secure.)

    2) Is there a capitulation point where you would sell them?
    (Aka, I am concerned that the payout stream of SOME issues is no longer secure, hence do not want to risk the capitol.)

    3) I have confidence prices will go up at same point and am NOT going to take any action buying or selling.

    Fall 5%, 10%, 25%, 50% further for example?

      1. Grid, I do expect spreads to widen. We know that all investors do NOT rationally price prefs/babys, particularly in a recession. For a given pref, we might make a strong case that their non-payment probability is ~nil, but the broad market will throw it out with the bath water. You can understand true junk issues widening because their non-payment probability really does increase, but I think we are all in the bathtub together. . .

    1. Tex,

      Thank you once again for valuable and meaningful data. Probably should be noted many of the preferreds above as being within 1% of lows may have recent ex-dates. The referenced PSA pfds all went ex last week. That might be meaningful.

      1)Will you keep buying?
      Absolutely. If it’s a market-driven re-price (not issue-specific) then buy, and all the way to the bottom of the sell-off. I’d suggest this decision and commitment should have been made when initializing the position, be that last week, last year or many years ago. But there are caveats.

      A portfolio of high-IG issues, including the above-referenced A-rated, low coupon issues with a declining price offers the owner the opportunity to add a combination of an increasing/highly dependable yield, at a continued high-IG rating, with deeper and deeper discount to redemption price and significant potential cap gains down the road. The potential cap gains are not part of the calculation, only a bonus. After the initial purchase, the future buy decisions are reflected in the already entered buy orders that sit and wait – sometimes for years.

      Ultimately, this high-IG investor may/will be obtaining yield higher than previously available to low-rated issues.

      This process might be less of an option with lower-rated issues which are laden with question, doubt and hope on day one. Adding low-rated issues to defend a position appears counter-productive and it may lead to self-loathing.

    2. I took a break buying with fresh cash for the last few months. I was mostly using payouts to add. Sheer laziness or wisdom is still unclear. At this stage I am starting to add money again.

      I will not sell unless something stops paying or I need the cash for some other important reason. Even then I would simply sell the riskiest positions as needed. So the answer is I am not selling as rates go up. I feel I have been doing this long enough not to fall into the trap of fear. Plus I sold the weakest stuff last year while the getting out was good. Should have sold more but alas…

      Prices will start to recover as soon as the fed signals rates will start to stabilize in my opinion. One should have made their purchases before that point. Will it be 2023 or later is an unknown. So I may as well start taking bites as the next 6 months progress.

      The end goal is very much a regular and dependable income to reinvest until the time we would like to spend some or not work as much.

  4. Is there a discrepancy between brokers how they treat baby bonds?
    I.e. some treat the discount to par as capital gain instead of treating it the correct way as market discount?
    That seems like an area where there would be discrepancies

  5. The PSA-O shares are yielding 5.824% with a chance at an $8.26 capital gain, however miraculous that chance may be.

    1. NewToThis2015–it will probably happen, but it will be a few years. That potential capital gain is what makes these enticing.

    2. I picked Psa-J to draw my line in the sand starting in February , added to reduce cost basis then, two more time since then reached what i considered my max, but its the best I an find for a Roth IRA with the tax treatment there, still have dry powder, Any suggestions?

      1. mike, Only because you asked:

        Look at the historical chart of any preferred. Identify the price points where you wish you could have purchased the shares in the past and consider the dialogue and sentiment of doom that was going at those price points.

        Assuming you’re building a position in these high quality issues, stick to your original plan and keep buying in meaningful but proportional adds at strategic price intervals. If you set/enter those bids now, you won’t have to stare at the action every day or second guess yourself if the price gets to your next buy point.

        We do not know when, though eventually you’ll buy right through the bottom of the trough. Meanwhile, your weighted buy-price is declining and your weighted yield is rising.

        Over the years, our best acquistion prices (stocks, real estate, other assets) have occurred 100% of the time when the market was “doomed”.

        Best wishes.

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