While it is easy to relate the performance of preferred stock and long term bonds to interest rate changes, the two asset classes have shown a low correlation to each other over the last three years. Actually, the S&P U.S. Preferred Stock Index has had a higher correlation to the S&P 500 than it did to long term to bonds. There is a danger in just looking at the last three years of course as interest rates have been held low during the period.
Three Year Correlations:
Will a rising interest rate environment bring the same pain to preferred stocks as it might to long term bonds? The short term history illustrates that the combined equity and bond like characteristics of preferred stock both play a role in actual performance. Like all things still to come, we will just have to wait and see how the markets unfold.
This article was written by J.R. Rieger, global head of fixed income, S&P Dow Jones Indices.
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