Opportunities in the Preferred Market

The Treasury market surged again yesterday as the turbulent week continued with another major selloff in equities, the Dow has lost 11.70% so far this month, which pushed investors into government debt. This morning we are seeing a mostly negative performance in the Treasury market as investors react to the slight decline in the weekly jobless claims report and a wider than expected trade balance. Currently the 2-year note has increased 1/32 to yield 0.17%. Meanwhile, the 5-year note has declined 5/32 to yield 0.95%. The benchmark 10-year note is currently trading 14/32 lower to yield 2.20% while the long bond has lost 1 2/32 point in value to yield 3.57%.

The recent downturn in equities has had ramifications in other asset classes, including Preferreds. This is particularly true as in period of economic instability preferreds tend to behave more like common stock. Not surprisingly, the closer the structure to common equity, the more volatile the preferred security is. Therefore QDI preferreds are down 9.84% from 5 days ago versus non-QDIs which have only experienced a loss of 4.13%. Although we expect volatility to continue, this recent drop in prices may represent an attractive option for some investors.

On the economic front, the Department of Labor released its weekly Initial Jobless Claims report showing that first time claims were marginally lower than expected last week at 395,000; analysts had expected a reading of 405,000. The previous week’s reading was upwardly revised to 402,000 versus 400,000. Also, the Continuing Claims report showed a lower than expected reading at 3.688 million versus the forecasted 3.725 million. The continuing claims revision for the previous week rose 18,000 to 3.748 million. Meanwhile, the more stable 4-week average number of Initial Claims, dropped by 3,250 to 405,000. Additionally, the Commerce Department announced that the Trade Balance widened unexpectedly by 4.40% in June to -$53.1 billion versus the expected -$48.00 billion and up from the -$50.8 billion registered the previous month. Although both imports and exports declined during that period, the rate of import decline was greater at -2.30% versus -0.80% for exports. This was partially due to a drop in U.S. shipments of capital which was 3.60% lower than in the previous month.