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iShares S&P U.S. Preferred Stock Index Message Board

  • checkers1004 checkers1004 Mar 11, 2010 12:39 PM Flag

    What's the outlook on PFF when interest rates rise?

    Looking for good yields but not a loss to principal..Any ideas..Thanks

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    • Wow, you actually are thinking about loss of principal. That puts you ahead of 95% of the investors out there.

      The Fed minutes today repeated that the current 0 - 0.25% Fed Funds policy will be continued for "an extended period of time." I take this to mean 6-months or more. The Fed is essentially allowing the banks to borrow at 0% so that they can invest long term at a much higher rate to build back their balance sheets. This is pretty much the same strategy behind buying PFF.

      Interest rates start to go up when the economy overheats. They eventually go up too much and cause a recession. The stock market usually catches wind of the recession before the policy makers do. But, you do not have to get out of PFF or stocks when rates first start rising. Fed Funds need to get back to 2-3% to be historically normal. Once Fed Funds start to go above 3%, I would start planning an exit from stocks.

      PFF has a beta of 0.90. That means that if the stock market moves up 10%, PFF should move up 9%. If stocks move down 10%, PFF should move down 9%. So this is very much like a stock fund but with a much higher yield.

    • pry to god

    • Individual Preferreds go down on 3 events:
      1. When a company has bad news. But it bounces
      back if the company is reasonably solid.
      For a sector fund like this it will go down when a sector has bad news
      but will bounce back if the sector is reasonably OK.
      2. When we have
      a market crash. But if the crash requires the feds to drop rates this etf
      will rebound (observe PFF during the last market crash which was severe for the financials).
      3. The first announcement that Fed rates will go up. There will be a panic
      sell off then it will rebound when people come to their senses and realize that the interest here is still better than
      they can get elsewhere.
      What you must fear is high interest like in the 70's. If the interest rates
      rise to say 14% this
      etf will be worth half because buyers must get a fair interest. The
      payout may stay the same but the etf price must drop to produce the return demanded
      by the market
      (which is me and you). The price of this etf (and most debt instrument type etfs, cefs, preferreds, etc.) will drop to produce the interest rate people
      can get elsewhere (It must yield greater than a CD rate.). But until interest rises that high, which could take many years,
      this instrument should
      only do panic (emotional) selling-bounces then rebound. So if you buy a preferred etf which experiences only minimal companies failing or suspending payments then you will get your interest.
      In times of ultra high interest, you may have to wait until the market (not treasury)interest rate drops before your principal
      comes back but it will when the interest rate comes down.
      I have invested in preferreds for years.
      They are somewhat predictable, unlike most other investment vehicles. What I mean is: you can figuire them out. But experience is the teacher. There are so very few experts out there that will show you the ropes like the options world...because it is so thinly traded.

      • 4 Replies to growflroses
      • Sorry, Didn't mean to sound like I have any great wisdom.
        Some points about this fund: I said that the fund will temporarily drop when the feds raises rate.
        There are other times when it can show stress, like now, when people even TALK about rate hikes.
        It is the "rate hike fear factor".
        The problem this time is that the feds did a lot more to stimulate the economy, besides dropping rates.
        So as it reverses policy on each stimulative action the rate hike fear could become intense and temporarily affect this ETF.
        But this is all fear and fear does (usually) ease up, people come back to their senses.
        When the real rate hike happens, THAT is a buying opportunity, because this etf (and every other debt based instruments)
        will dive, but they will rebound until the fed rate get too high.
        Do you want a real education about debt based instruments? Look up the Fed Rate hikes and their dates.
        Pick a debt based etf, cef, individual preferreds, etc.
        Watch what happens to these debt instruments during rate hikes and drops. Everyone holds their breath until rate hikes happen; when they do prices for debt instruments crash, then they rebound.... a buying opportunity.

        Correlate the prices with stock prices during market crashes. Pick a CEF; look at their price history, but MORE importantly look at their payout history and how so many drop over time.
        See what happened to these instruments in the 70's. It will build your confidence so you don't panic when things happen.
        About the payout dropping over time. It could happen here.
        Remember that preferreds usually have a call life (not maturity) of 5 years.
        If some are called this ETF will have to go back to the marketplace to buy more.

        They may have to settle for lower yielding instruments. So unlike I said earlier your payout has the potential to drop.
        About buying more of these instruments with earnings. I am retired.
        I take the income and live off it, because i have no pension or Social Security.
        What is left
        over I put back into these things because that's all I know.
        I am shopping again and for the first time am checking etfs like this.
        Why? Because if I leave this world I want to specify etfs, possibly like this one, my wife should buy for income because I don't think she wants to
        do research on each individual preferred like I do. Good Luck. I don't visit boards much. So will leave with that. Thanks for the kind words.
        PS. quantumonline is a great teacher about debt instruments. It is an unbelievable free site.

      • would buy at 38 or below

      • Sir, thank you also. Hope to learn a thing or two from you.
        Have pff,pgf,pgx

      • Good post. Thanks for taking the time.

    • Non callable preferreds can be seen as long duration bonds. And as such I'm afraid they will not hold up all that well in a rising interest rate environment.

      Think about it: a preferred paying 6 % when 10s are at 2.7 % may sound good. But do you think it will still trade at a yield of 6 % when 10s are at 4%? Probably not. So it will trade at a higher yield, and like bonds, it will go down in price as the yield adjusts.

      • 4 Replies to klaragorn
      • The word 'duration' is key in a rising interest rate environment.

        What is the duration of PFF? I failed to find the number on the Ishares website or any of the posts for this thread.

        Give us a number please.

      • This is true. Bonds should decline as the 10s yield increases because there is less risk in treauries than in PFF. PFF should decline if we get into QE3 just as the yield on 10s increased after QE2 was announced. 10s have gone from 2.4% to 3.5% today in that time. Although Qual Easing temporarily tends to hold down long term rates it builds up pressure for rates to increase at an accelerating rate in the future.

        In the 125 trading days since Sept 1st the yield on the 10s have increased 1% yet the price of PFF decreased from a close of 39.80 to the current 39.40. Not much . Of course the market has gone up a lot during this period.

        PFF div. is safe if its traders manage their portfolio wisely and PFF yield should also have a clear premium over LQD and Treasuries although the stock price may gradually decline to accomplish this. If you want dividends and yield this should not bother you.

      • Rising interest rate is bad for all, bonds, stocks and preferred.
        When the interest rate rise, value of interest payment from bond decrease hence bonds are valued less; cost of borrowing increases and the profit decreases hence the stocks are valued less. Since preferred are more like bonds the same rules apply. Any future payment will be valued less, that include both the principal and the dividend. However the impact of interest rate increase on a 3% bond and 7% preferred vary. There will be larger impact on low yielding bonds compared to high yielding preferred. However the risk of companies deciding not to pay dividends on preferred is more compared to stop paying interest on bonds.

      • Of course there is a credit spread component to it, so it is conceivable that the preferred may stay where it is in price as the underlying credit is perceived to be safer. But I don't think that in aggregate it will be able to cushion all of the downward pressure.

    • These are not bonds.

      Stks go up with rising rates, until the rising rates slow down a heated economy . That's a long time from here

 
PFF
39.11-0.01(-0.03%)Dec 24 1:00 PMEST

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