As the discussion in April turned to how much the Federal Reserve was going to raise interest rates, Spectrum Asset Management founder, president, and CEO Mark Lieb said that the preferred and capital securities markets have “gotten oversold,” with preferred securities “trading around the same level as municipal bonds.”
Speaking with NYSE’s Judy Shaw for “ETF Leaders, Powered by the New York Stock Exchange,” Lieb predicted that “by the summertime,” the conversations will center around what the central banks have on their balance sheets, what they’re looking to buy, and what they’re planning to sell.
“Luckily, in our little world of preferreds, the central banks have not been buying our paper,” said Lieb at Exchange: An ETF Experience 2022, since their paper consists primarily of “banks, insurance companies, and utilities.”
As investors seek yield amid a possible impending recession, Lieb said that Spectrum is “set up in a pretty good way,” since the firm is “not in one of those asset classes that are clearly people are going to be focusing on.”
He added that central banks also don’t own municipals, which is a tailwind for Spectrum. “I think we[’ll] have probably a good second half of the year” as investors look for yield, since the firm has “great spreads [and] good entry points into the market right now,” Lieb said.
Lieb explained that, like everyone, Spectrum is “concerned about inflation.” And high inflation is being driven by a few factors, from supply chain issues to political issues to the war in Ukraine, which he said won’t be fixed by raising rates.
“You got a lot of different things that are involved. But just raising rates doesn’t fix some of these problems,” he said.
And while he expected inflation to “be trending down… by the end of the year,” Lieb did note that “we’ll have to see.”
“Inflation is like a cancer in economics,” Lieb added. “It can cause a lot of damage.”
The Spectrum founder cited a recent article in Bloomberg noting that 80% of the working population in the U.S. was living paycheck to paycheck, while 100% of the population was paying 50% more for energy, gas, heating, and air conditioning.
“So, you’ve eviscerated excess capital and discretionary money of 80% of the working population,” he said.
Opportunities in the Preferred Markets
Spectrum’s market is divided into three areas: the $25 par preferreds controlled by the ETFs that trade on NYSE, the $1,000 pars on the institutional side, and the contingent capital preferreds that are the European version of that marketplace.
“I think there’s opportunities in all three,” Lieb said, explaining that while the $25 par market will probably be “a little bit more volatile,” it’s still “very attractive.”
Lieb reiterated that Spectrum is “set up pretty well for the second half of the year.”
“We’re buying good, quality companies with good balance sheets and good earnings,” he said. “And in the end, you don’t lose money buying good, quality companies.”
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