Bank of America: Fixed-rate preferred stocks in the U.S. stock market are becoming hot commodities! How to invest?

Recently, Bank of America Global Research released an investment strategy report on preferred stocks, analyzing duration trends, performance of preferred stocks with different face values, and investment recommendations to provide guidance for investors. Duration rebound, fixed-rate preferred stocks stand out The US Treasury market has shown a "bull steepening" pattern (short-term interest rates declining more than long-term rates), sparking market interest in duration. Bank of America's rate strategists believe that front-end rates will decrease more, while back-end rates will see a more moderate decline, with the expectation that by the end of 2025, the yield on the US 10-year Treasury bond will reach 4.25%. The market also agrees with this dovish expectation: federal funds futures indicate the possibility of two 25 basis point rate cuts by the end of the year, surpassing the one cut expected 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 July's CPI showed weaker-than-expected impact of tariffs on commodity inflation. This shift in sentiment has driven increased attention to duration in the preferred stock market. Looking at ETF fund flows, demand from retail investors for 25 USD face value fixed-rate preferred stocks (such as the PFF fund) has risen to a 9-month high, surpassing 1000 USD face value floating-rate preferred stocks (such as the VRP fund). In terms of performance, 25 USD fixed-rate preferred stocks have risen by 2.9% in the second half of the year, significantly outperforming 1000 USD fixed-floating rate preferred stocks (which increased by 0.9% during the same period). 25 USD face value preferred stocks still offer relative value Despite rising demand and yields, 25 USD face value preferred stocks are still cheaper compared to 1000 USD face value stocks: in terms of spreads, the former is about 63 basis points tighter than the latter, reaching the 84th percentile since 2012. However, with the rebound of 25 USD preferred stocks in the second half of the year and the increase in net supply of 1000 USD preferred stocks (as global 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 (95th percentile since 2012). Caution may be warranted in observing older versions of 1000 USD face value preferred stocks For those who are cautious about duration, Bank of America recommends focusing on older versions of 1000 USD face value preferred stocks. The reason being: current employment growth slowing not only due to insufficient demand but also related to a decrease in labor supply, core inflation still higher than the target. These older preferred stocks, although offering lower yields than newer issuances, have shorter tenors, lower sensitivity to interest rates, less crowded positions, and yield over 100 basis points higher than investment-grade bonds. In addition, their back-end spreads are wider, reducing rollover risks - with the average back-end spread of new preferred stocks issued in 2025 at only 275 basis points, the narrowest on record. 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, and Bank of America Securities may have business dealings with issuers mentioned in the report, which may affect objectivity. For more information, please refer to the report disclosure.