Bloomberg News

Preferred Shares ETF Drops as Yields Rise on Fed Speculation

June 13, 2013

An exchange-traded fund (PFF:US) that mimics a basket of preferred shares is suffering the worst four-day stretch in 20 months amid deepening concern the Federal Reserve will pare unprecedented stimulus.

The iShares S&P U.S. Preferred Stock Index Fund (PFF:US) has dropped 5.7 percent from an almost five-year peak on May 8, in the worst four-day rout since October 2011.

Perpetual preferred stocks, whose fixed dividends mean they trade like bonds, have lost 5.6 percent as of yesterday since peaking on May 8, compared with the 1.2 percent drop in the Standard & Poor’s 500 Index (SPX), according to data compiled by Bank of America Merrill Lynch and Bloomberg.

Investors in securities from Treasuries (USGG10YR) to emerging-market debt have been rattled as the Fed weighs a pullback from policies that have poured more than $2.5 trillion into the financial system since 2008. Yields on dollar-denominated bonds from the most to least creditworthy borrowers jumped to 3.91 percent yesterday, from a record low 3.35 percent on May 2, Bank of America Merrill Lynch index data show.

Because the asset class is ranked below subordinated debt, “as senior debt got cheap, it got hit,” Peter Tchir, founder of hedge-fund adviser TF Market Advisors, said in an e-mail. “The crowded trade syndrome where outflows (PFF:US) hit” sparked price declines, he said.

Investors pulled a record $4.8 billion from U.S. high-yield bond funds last week and $850 million from investment-grade funds, the first weekly redemption since December, according to a Bank of America Corp. report.

Companies have issued $21.1 billion of preferred stock this year, compared with $18.5 billion in the same period of 2012, Bloomberg data show.

The U.S. Corporate & High Yield Index lost 2.6 percent through yesterday since Fed Chairman Ben S. Bernanke told Congress on May 22 the central bank could slow stimulus efforts during its next few meetings if the economy shows signs of sustainable improvement. The S&P 500 fell 3.4 percent in the same period.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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Companies Mentioned

  • PFF
    (iShares US Preferred Stock ETF)
    • $39.11 USD
    • 0.01
    • 0.03%
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