Quality Perpetual Preferreds and Baby Bonds Getting Shellacked

11 a.m.

In a continuation of the trends from all week perpetual preferreds and long duration baby bonds are getting the tar beat out of them.    This is something that happens when interest rates rise sharply and is the same price action we have seen over the years–when rates move higher high quality preferreds and baby bonds move much faster with larger losses than the low quality, high yield perpetuals.  It is a catch-22 of sorts–we all want the best quality issues consistent with the yield we desire–if you want safety you have a higher interest rate risk with bigger capital dings when rates move.

The positive to this is that if you liked an issue with a current yield of 5.25% you should love that same issue with a 5.75% or 6% current yield.  We personally have one of these in the Dominion Resources 5.25% baby bond (NYSE:DRUA) which is a fairly new issue.  DRUA is off $1/share at this moment with a current yield of 5.7%–we have just added to our position in the last hour, and if it falls further we will add a bit more.  It is the only long duration holding we have and we plan to simply stick with it-through thick or thin.  The vast majority of the issues we own are in shorter duration securities and while they are off a bit it is very minimal.  The Short/Medium Duration Zip Portfolio shows you how these shorter duration issues have traded – very solid.

Some of the quality issues trading today at lower prices are issues from Allstate, Capital One, First Republic Bank, the various Gabelli CEF preferreds, JPMorgan  and Public Storage.  These issues are trading with current yields 1/2 to 3/4% higher than at this time last week.  Obviously we have no clue as to whether they will become better bargains in days ahead, but if you are looking for solid quality these are looking decent. You can review investment grade perpetuals and baby bond issues here.

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