Do Bank Preferred Shares Really Have to Fear Fed Exit and Rising Rates Too?

Investing

Published: June 20, 2013 1:02 pm

The volatility in the stock market is coming with an unusual twist and that is that there is no place to hide. The market flush is being seen over concerns about the end of the economic stimulus packages, and this is crushing the price of bonds and commodities as well. If there is one investment sector that is supposed to have the least volatility of nearly all investable sectors, it is the preferred stock sector of the financial firms. We are seeing an increase in volatility in the PowerShares Financial Preferred (NYSE: PGF) and this may concern some investors.

The sector of preferred shares is supposed to be largely immune to gyrations in stock prices because the banks have to pay these preferred dividends almost without exception. In fact, the preferred bank shares are supposed to be even safer than investing in Wells Fargo & Co. (NYSE: WFC) and J.P. Morgan Chase & Co. (NYSE: JPM). So, even if the Federal Reserve is going to taper off its $85 billion in monthly bond buying you are not supposed to have to have serious fears in the preferred shares of the bank and finance sector even though we are seeing that fear rise now.

Unfortunately, rates have risen handily in the last seven weeks. The market is spooked that Ben Bernanke is going to pull the plug in a manner that a economic hard landing will come instead of a soft landing after years of adding endless stimulus capital being added into the economy. That is driving up the yield premium, which has hurt the price of the preferred sector.

Shares of the PowerShares Financial Preferred (NYSE: PGF) hit a low of $167.56 on Thursday and are currently down 0.9% at $17.71, but that 52-week trading range is $17.38 to $18.85. The current dividend yield here is about 6.23% now that we have seen a sell-off. The lowest price we have seen in recent days and weeks for a closing bell price (adjusted for dividends) was $17.56 and the absolute low without adjusting for dividends was $17.38.

Be advised that this sector is not likely to see any massive rally in price if the market flush stops. What is interesting is that this sector is not supposed to see any major drop in price either, yet we have seen shares slide 6% from their 52-week highs over the last month or so. The common stock of Wells Fargo & Co. (NYSE: WFC) is not even down 4% against its 52-week high and J.P. Morgan Chase & Co. (NYSE: JPM) common stock is down about 5.5% from its 52-week high. These are supposed to be the safest of the money-center banks, and the trust preferred stocks for banks are higher in the capital structure than the mere common stockholder.

It is an odd occurrence to see the PowerShares Financial Preferred (NYSE: PGF) trade in this manner considering that the market sell-off is in reality very far from any real crisis mode. The chart below from stockcharts.com will show just how odd this trading has been of late.

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