Bank of America: US fixed interest rate preferred stocks have become bastards! How to vote?

The Zhitong Finance App learned that recently, Bank of America Global Research published an investment strategy report on preferred stocks to analyze long-term trends, performance of preferred stocks with different face values, and investment suggestions to provide investors with reference.

Long-term rebound, fixed interest rate preferred stocks became the highlight

The US Treasury bond market showed a “steep bullish pattern” (short-term interest rates fell more than the long term), triggering the market's desire for a long time. Bank of America interest rate strategists believe that front-end interest rates will drop even more, and back-end interest rates will drop moderately. The yield on US 10-year Treasury bonds is expected to reach 4.25% by the end of 2025.

The market also agreed with this loose expectation: federal funds futures showed that there may be two and a half 25 basis point interest rate cuts at the end of the year, far exceeding the one and a half expectations at the end of July. However, Bank of America economists believe that the Federal Reserve may maintain interest rates until the second half of 2026, even if the July CPI shows that the impact of tariffs on commodity inflation is weaker than expected.

Figure 1: Number of interest rate cuts factored into the price and the US 10-year Treasury interest rate

This shift in sentiment is driving the preferred stock market's long-term focus. Looking at ETF funding flow, retail demand for $25 fixed-rate preferred stocks (such as PFF funds) has risen to a 9-month high, surpassing $1,000 in variable interest rate preferred stocks (such as VRP funds).

In terms of performance, $25 fixed rate preferred stocks rose 2.9% in the second half of the year, outperforming $1,000 fixed floating rate preferred stocks (up 0.9% over the same period).

Figure 2:12-week trailing capital flow for fixed and variable interest rate ETFs on preferred shares

Figure 3: Cumulative returns over the year for $25 and $1000 denominated preferred stocks

Preferred shares with a face value of $25 are still relatively valuable

Despite rising demand and earnings, $25 denominated preferred stocks are still cheaper than $1,000: the former is about 63 basis points closer than the latter in terms of spreads, at the 84th percentile since 2012.

However, as $25 preferred shares rebounded in the second half of the year and the net supply of $1000 preferred shares increased (global systemically important banks returned to the primary market), their relative value moved away from extreme levels. At the end of June, the spread between the two was less than 30 basis points (95th percentile since 2012).

Figure 4: Spread spread between $25 and $1000 par value preferred shares

Cautious people can pay attention to the old $1000 face value preferred stock

If you are cautious about the long-term term, Bank of America suggests focusing on $1,000 face value preferred stocks that were issued earlier.

The reason is that the current slowdown in employment growth is not only due to insufficient demand, but is also related to a decrease in labor supply, and core inflation is still higher than the target. Although the yield of these older preferred stocks is lower than that of newcomer varieties, they have shorter terms, are less sensitive to interest rates, are less crowded, and yield more than 100 basis points higher than investment-grade bonds. Furthermore, its back-end spreads are wider, reducing rollover risk — while the average back-end spread for new preferred stocks in 2025 was only 275 basis points, the narrowest on record.

Figure 5: $1000 Face Value Preferred Stock Yield and Price by Year of Issue

Figure 6: Average back-end spread for new issuance of $1,000 denominated preferred shares

Risk Warning: The trading strategies covered in this article have significant risks and are not suitable for all investors. Investment decisions need to be based on one's own circumstances. Bank of America Securities may have business dealings with the issuers involved in the report, which may affect objectivity. See report disclosure for details.