U.S. bank preferred shares deepen losses as pandemic-era securities trap investors
Pandemic-era bank preferred shares in the U.S. are extending their decline this year, leaving investors stuck in a trade with few practical exit options. The $22 billion segment is underperforming even the weakest junk bonds, while issuers continue to bypass repayment options that could have limited investor losses.
Highlights
- Fixed-for-life preferred shares issued by banks during the pandemic have lost 8.5% in total return this year and nearly 40% since issuance.
- Issuers, including pending Morgan Stanley, have skipped all repayment options, prolonging investor exposure and limiting opportunities to exit without losses.
- Preferred shares have underperformed even the riskiest junk bonds, intensifying pressure on holders amid weak prices and illiquid markets.
Performance slide in fixed-for-life bank securities
As reported by Bloomberg, some fixed-for-life preferred shares sold by banks during the pandemic era have lost 8.5% in total return terms this year, placing the group among the worst-performing parts of the global credit market.The securities have fallen nearly 40% since issuance, and investors have so far been unable to rely on issuer repayment options as a path out of the trade without taking losses. Every issuer has skipped those options to date, and a pending decision by Morgan Stanley may complete that pattern across the group.
Pressure on investors across credit markets
The scale of the decline stands out because the preferred shares are slumping more sharply than even the riskiest parts of the junk-bond market. That relative underperformance is intensifying pressure on holders who bought the securities when banks issued them during the low-rate pandemic period.With issuers declining to redeem the securities, investors remain exposed to price weakness and limited liquidity. The trend highlights how structures that once offered attractive income can turn into prolonged losses when repayment expectations fail to materialize.
We have previously detailed how IMF forecasts pointed to an uneven European recovery shaping credit-market sentiment and borrowing conditions.
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