Bank of America: U.S. fixed-rate preferred stocks have become hot commodities! How to invest?

According to the Zhitong Finance APP, recently, Bank of America Global Research released an investment strategy report on preferred stocks, analyzing duration trends, the performance of preferred stocks with different par values, and investment recommendations to provide reference for investors.

Duration rebound, fixed-rate preferred stocks become the highlight

The U.S. Treasury market has shown a "bull steepening" pattern (where short-term interest rates decline more than long-term rates), leading to increased market interest in duration. Bank of America rate strategists believe that front-end rates will decline more significantly, while back-end rates will see a moderate decrease, predicting that by the end of 2025, the yield on the U.S. 10-year Treasury will reach 4.25%.

The market also agrees with this easing expectation: Federal funds futures indicate that there may be two rate cuts of 25 basis points each by the end of the year, far exceeding the expectation of one and a half cuts at the end of July. However, Bank of America economists believe that the Federal Reserve may maintain rates until the second half of 2026, even though the July CPI showed that tariffs had a weaker-than-expected impact on goods inflation.

Figure 1: Number of rate cuts priced in and the U.S. 10-year Treasury yield

This shift in sentiment has driven the preferred stock market's focus on duration. From the ETF fund flows, retail demand for fixed-rate preferred stocks with a par value of $25 (such as the PFF fund) has risen to a nine-month high, surpassing the demand for floating-rate preferred stocks with a par value of $1,000 (such as the VRP fund).

In terms of performance, fixed-rate preferred stocks with a par value of $25 rose by 2.9% in the second half of the year, significantly outperforming fixed floating-rate preferred stocks with a par value of $1,000 (which rose by 0.9% during the same period).

Figure 2: 12-week trailing fund flows for fixed-rate and floating-rate preferred stock ETFs

Figure 3: Cumulative returns of $25 and $1,000 par value preferred stocks year-to-date

$25 par value preferred stocks still have relative value

Despite the increase in demand and yield, $25 par value preferred stocks remain cheaper than $1,000 par value ones: in terms of spread, the former is about 63 basis points tighter than the latter, sitting at the 84th percentile since 2012.

However, with the rebound of $25 preferred stocks in the second half of the year and the net supply increase of $1,000 preferred stocks (as globally systemically important banks return to the primary market), their relative value has moved away from extreme levels. At the end of June, the spread between the two was less than 30 basis points (the 95th percentile since 2012) Figure 4: The spread difference between $25 and $1,000 par value preferred stock

Cautious investors may pay attention to the old $1,000 par value preferred stock

For those cautious about duration, Bank of America recommends focusing on the older $1,000 par value preferred stock.

The reason is: the current slowdown in employment growth is not only due to insufficient demand but also related to a decrease in labor supply, with core inflation still above target. Although these old preferred stocks have lower yields than newly issued varieties, they have shorter durations, lower sensitivity to interest rates, less crowded positions, and yields that are over 100 basis points higher than investment-grade bonds. In addition, their back-end spreads are wider, reducing rollover risk—while the average back-end spread of newly issued preferred stocks in 2025 is only 275 basis points, the narrowest on record.

Figure 5: Yield and price of $1,000 par value preferred stock by issuance year

Figure 6: Average back-end spread of newly issued $1,000 par value preferred stock

Risk Warning: The trading strategies discussed in this article carry significant risks and may not be suitable for all investors. Investment decisions should be made based on individual circumstances. Bank of America Securities may have business dealings with the issuers mentioned in the report, which may affect objectivity. For details, please refer to the report disclosures