Income Oasis: UBS Identifies Favorable Investment Opportunities as Treasury Yields Retreat from Recent Highs

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Investing / Monday, 20 November 2023 04:13

"UBS Identifies Income Opportunities: Preferred Securities Shine as Treasury Yields Retreat"

In the wake of declining Treasury yields, UBS is spotlighting a promising income asset—preferred securities. Combining features of both stocks and bonds, preferreds trade on exchanges like equities while delivering a stream of income akin to fixed-income investments. The recent resurgence in Treasury rates had impacted the preferred securities sector, resulting in three consecutive monthly losses. However, relief has arrived with the 10-year Treasury yield slipping back below 4.5% in November, sparking a notable rebound in preferreds, according to Frank Sileo, Senior Fixed Income Strategist for the Americas at UBS.

While preferred shares present an attractive income proposition, they come with distinctive characteristics. Many are callable, allowing the issuing company to redeem them, and their performance is closely tied to the financial strength of the issuer. Credit monitoring agencies, such as Standard & Poor's and Moody's Investors Service, often rate these securities. Notably, financial services companies dominate preferred issuance, impacting the risk profile for investors who delve into these offerings.

UBS has identified top picks among preferred securities, tailoring recommendations for different risk profiles. Allstate's preferred shares are touted for conservative portfolios, offering a fixed-for-life perpetual with a high 7.375% fixed coupon. For moderate portfolios, UBS suggests considering Brighthouse Financial's preferred with a 6.75% coupon and call protection until June 2025. For more aggressive strategies, Triton International's preferred, featuring an 8% coupon and call protection until September 2024, is highlighted. This preferred offering remains active despite the company's recent acquisition.

As investors navigate the evolving landscape of Treasury yields, UBS provides a strategic lens on preferred securities, emphasizing the nuanced considerations for incorporating these assets into diverse portfolios.

"In Conclusion, UBS Guides Investors Through the Preferred Securities Landscape Amid Shifting Treasury Yields"

As Treasury yields experience a retreat, UBS positions preferred securities as a beacon of opportunity for income-seeking investors. The nuanced qualities of these assets, bridging the characteristics of stocks and bonds, become particularly relevant in a market influenced by fluctuating rates. While the recent surge in Treasury rates had momentarily dampened the preferred securities sector, the easing back of yields has ushered in a resurgence, prompting a fresh evaluation of these income plays.

UBS, recognizing the unique features of preferred shares, cautions investors about the callable nature of many of these assets and their dependency on the financial strength of the issuing companies. The dominance of financial services companies in the preferred issuance landscape adds an additional layer of consideration for those looking to optimize their portfolios.

In providing specific recommendations tailored to varying risk profiles, UBS underscores the importance of a strategic approach. From Allstate's preferred shares for conservative portfolios to Brighthouse Financial's offerings for moderate strategies and Triton International's preferreds for more aggressive plays, UBS offers a spectrum of choices.

Navigating the intersection of preferred securities and shifting Treasury yields requires a discerning eye, and UBS stands as a guide, illuminating potential income opportunities and offering a roadmap for investors seeking to strike a balance between risk and reward in their portfolios. As the market continues to evolve, UBS's insights serve as a valuable compass, helping investors navigate the complexities and capitalize on income plays in the current financial landscape.