We have updated our privacy policy and terms & conditions. Find out more here.
0
 

Preferreds Better Than Treasuries Post QE3

By  |  Market Overview  |  Sep 24, 2012 04:18PM GMT  |   Add a Comment
 
AA
+
-
Nothing is secure but life, transition, the energizing spirit.” -- Ralph Waldo Emerson

As investors continue to position portfolios following the Fed's QE3 announcement of unlimited mortgage backed securities buying, it appears there is quite a bit of movement occurring on the long-end of the Treasury curve. Expectations for QE3 were for a more aggressive Treasury bond buying program, which helped push Treasury prices ever higher and yields lower. Those expectations partially got dashed following the actual announcement, sending the 30-Year Treasury yield soaring to over 3% in the blink of an eye. However, in recent days, a meaningful recovery in Treasury prices has occurred as investors question whether monetary action will force reflation or not.

Stock And Bond Hybrids
I do not believe this is a harbinger of bad things to come just yet. Money seems to be more and more comfortable with risk-taking, and high yielding areas of the bond market continue to perform well. As the Fed crowds money out of certain areas of the investable landscape, it is going elsewhere. One of the areas that is benefiting clearly appears to be in the “hybrid” of stock and bond investments known as Preferreds. Take a look below at the price ratio of the iShares S&P US Preferred Shares ETF (PFF) relative to the iShares 20+ Treasury Bond Fund (TLT). As a reminder, a rising price ratio means the numerator/PFF is outperforming (up more/down less) the denominator/TLT.
PFF:TLT
PFF:TLT

Strength Ahead
Notice that the trend has been fairly strong favoring Preferreds as an income and capital appreciation play relative to Treasuries since the end of May and before the June 4 low in risk assets, and that the ratio is now hitting up against resistance. I suspect this is a retest to the trend line, and that continued strength seems likely in the coming months. I say this because of continued leadership in Financials (XLF), which make up a substantial portion of the PFF ETF. Our ATAC strategies used for managing client accounts also remains favorably inclined towards equities. Given that central banks have committed themselves to forcing reflation, it seems ever more likely that the time for Treasuries is likely over, and that money will continue to take more risk in non-bond investments. Preferreds seem to be the transitional vehicle of choice for now to do that.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data .

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

Add a Comment

 

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Financials
 
 
 
Are you sure you want to delete this chart?
 
 
 
Are you sure you want to delete this chart?
 
 
 

Successfully Reported

Thank you. This comment has been flagged for a moderator.
_touchLoadingMsg