Key takeaways
- Preferreds posted solid gains in June, with the ICE BofA Fixed Rate Preferred Index up 1.65%, turning YTD returns positive at 1.01%.
- Dovish Fed commentary and easing inflation prints drove yields lower across the curve.
- Bank capital rules continued to ease, with all major US banks clearing the Fed’s stress test and a proposal unveiled to ease SLR requirements.
- Fixed-to-floating rate structures continued to outperform in the first half of the year as the yield curve steepened.
Recap
June was a month of stabilization and subtle strength for preferreds. The ICE BofA Fixed Rate Preferred Securities Index returned 1.65%, bringing year-to-date performance to 1.01%. Institutional capital securities continued to outperform retail paper, with the $1,000 par ICE BofA US Investment Grade Institutional Capital Securities Index up 1.87% in June and +4.23% year-to-date. Meanwhile, the $25 par ICE BofA Core Plus Fixed Rate Preferred Securities Index lagged once again, gaining 1.33% in June but still down 1.00% for the year.
Treasury yields declined across the curve in a parallel move lower, reflecting softer inflation prints and dovish Fed commentary. The two-year yield fell 17 bps to 3.72%, while the 10-year dropped 17 bps to 4.24%. Both declining real yields and reduced break-even inflation expectations drove the downward move. Markets are pricing in over two rate cuts for the year, in line with the Federal Reserve’s projected path, as seen in the recent dot-plot. The Fed’s June Summary of Economic Projections showed policymakers are now expecting one fewer cut through 2026 and 2027, even as the market continues to price nearly two to three rate cuts for late 2025. That gap may close in coming months, but preferreds with reset features are positioned to benefit from lingering rate volatility. Fixed-to-floating preferreds continue to screen well in this “higher for longer” front-end rate regime.
We’ve started to see a divergence of opinion within the Fed on rate cuts. While 10 Fed officials see two rate cuts, seven see no rate cuts for this year. Meanwhile, the White House stepped up calls for lower rates in June. Fed governors Christopher Waller and Michelle Bowman, both appointed during President Trump’s last administration, recently stated they would be open to rate cuts at the next FOMC meeting in July.
The Fed released results from the 2025 Dodd-Frank Act Stress Tests, with all 22 participating banks passing. Loss estimates were lower than in 2024 and capital drawdowns more moderate. Most large banks are expected to see 50- to 150-basis-point (bps) reductions in their stress capital buffers (SCBs) starting in 2026. The Fed is expected to soon finalize a proposal to smooth SCBs by averaging results over two years, aiming to further reduce volatility in capital requirements.
Additionally, the Fed unveiled a Notice of Proposed Rulemaking on June 25 to ease supplementary leverage ratio (SLR) rules, reinstating exclusions for reserves and Treasuries. This would mark a return to pre-2020 treatment, and it could help increase GSIB balance sheet capacity and reinforce support for preferreds issued by systemically important banks.
Preferred ETF flows were positive in June, exceeding $100 million. More than $6 billion in expected redemptions and calls provided a tailwind to technicals. Year-to-date total bank redemptions now exceed $18 billion, roughly the same number as have been issued. We expect that trend to continue as some of the large back-ends from the 2020 vintage get called.
Utility and insurance names remained active in the primary market, with callable and fixed-to-float structures in demand. A third Canadian cable and media borrower hit the dollar market, and a large French bank priced a dollar contingent convertible deal. The ICE BofA Contingent Capital Index is up 4.63% at the midpoint of the year.
Looking ahead
As we move into the second half of 2025, preferreds are entering a more favorable macro and regulatory environment. Disinflation trends remain intact, but core readings have proven sticky. Bank credit quality remains strong, and capital distributions are likely to increase in Q3 and Q4. Political risks, including Fed independence rhetoric and fiscal policy overhangs, may lift term premia and support demand for income-generating hybrids.
We continue to favor callable fixed-to-floating structures with qualified dividend income treatment for taxable investors. Bank and utility sectors remain well-positioned from tariff volatility. However, the 90-day reprieve from reciprocal tariffs is due to expire in July, and markets could experience volatility if the White House imposes tariffs at their original levels.
In our view, high yields in preferred securities should continue to attract investor demand following solid performance in the first half of 2025. Valuations have recovered toward longer-term averages, but stable fundamentals and light new issuance continue to support credit spreads. In a coupon-driven environment, the aftertax income advantages of preferreds remain compelling.
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