Clients are better off underweighting their bond allocations due to valuation concerns in favor of equities and alternative assets, said Heather Loomis, West Director of Fixed Income at J.P. Morgan Private Bank.



Why Consider Preferred Securities When Rates Are Rising

Considering preferred securities when interest rates are rising is an interesting strategy that some investors might explore. Preferred securities are a unique class of investment that can have characteristics of both stocks and bonds. Here are some reasons why investors might consider preferred securities when interest rates are on the rise:

1. Yield Advantage

Preferred securities often offer higher yields compared to common stocks or some traditional bonds. As interest rates rise, the yield on new bonds also tends to increase. This can make the higher yields of preferred securities relatively attractive.

2. Income Generation

Investors who are seeking stable income might find preferred securities appealing. They often come with regular fixed dividend payments, providing a steady income stream.

3. Relative Stability

While preferred securities are still subject to market fluctuations, they are generally considered less volatile than common stocks. This relative stability can be attractive for investors who want some income without the full volatility of equity markets.

4. Rate Protection

Some preferred securities have features that can help protect investors from rising interest rates. For example, certain preferred stocks have adjustable dividend rates that are linked to a benchmark interest rate. This means that as interest rates rise, the dividend payments on these securities may increase.

5. Diversification

Adding preferred securities to a portfolio can offer diversification benefits. They have different risk and return profiles compared to traditional stocks and bonds, which can help balance a portfolio.

6. Hybrid Nature

Preferred securities have elements of both stocks and bonds. While they don't usually offer the potential for significant capital appreciation like stocks, they generally have more stable price movements than common stocks. This hybrid nature can be appealing to investors looking for a balance between growth and income.

7. Callable Features

Some preferred securities have callable features, meaning the issuer can redeem them after a certain period. If interest rates rise significantly, issuers might choose to call and reissue preferred securities at lower rates, potentially affecting investors' income.

8. Research and Selection

Investors interested in preferred securities should carefully research individual securities. Not all preferred securities are the same, and factors like credit quality, issuer reputation, and terms of the security can significantly impact their performance.

9. Risk Consideration

It's important to note that preferred securities are not risk-free. They are still subject to issuer-specific risks, credit risk, interest rate risk, and market volatility.

10. Professional Guidance

Considering preferred securities, especially in a rising rate environment, requires a good understanding of market conditions and the specific features of these investments. Consulting with a financial advisor can provide valuable insights.

It's crucial to assess your investment goals, risk tolerance, and overall portfolio strategy when considering any investment, including preferred securities. While they can offer benefits like income and diversification, they also come with their own set of risks and nuances that investors should thoroughly understand before making decisions.


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