Key takeaways
- The ICE BofA Fixed Rate Preferred Index returned 1.45% in July, bringing YTD gains to 2.47%. The $25 par ICE BofA Core Plus Fixed Rate Preferred Securities Index rebounded with a 2.77% return, while ETF inflows exceeded $150 million.
- Q2 bank results showed stable net interest income (NII), modest loan growth and healthy credit quality. Several banks raised full-year NII guidance, and capital positions remain robust.
- July payrolls rose by just 73,000, with large downward revisions to prior months. The unemployment rate ticked up to 4.2%, and market pricing now reflects a likely rate cut at the September 17 FOMC meeting.
- The Fed is fast-tracking Basel Endgame and SLR reforms, supporting capital flexibility and M&A. The One Big Beautiful Bill Act (OBBBA) codifies student loan reforms, but tariff income may offset much of the fiscal impulse from the $3.4 trillion bill.
Recap
Preferred securities continued to deliver solid performance in July, with the ICE BofA Fixed Rate Preferred Index up 1.45% for the month and 2.47% year-to-date. The $25 par ICE BofA Core Plus Fixed Rate Preferred Securities Index reversed months of underperformance, gaining 2.77%, while the $1,000 par ICE BofA US Investment Grade Institutional Capital Securities Index returned 0.42%. Investor demand remains robust, as evidenced by over $150 million in ETF inflows for July— including a $100 million rebound in the final week.
On the supply side, technicals remain favorable. Year-to-date bank preferred issuance has reached $27.5 billion, a 27% increase over the same period last year. Redemptions and calls totaled $18.7 billion, resulting in positive net issuance of $8.8 billion. July’s new issue calendar was active:
- One money-center bank priced $2.7 billion of Ba1/BB $1,000 par perpetual non-call 5 preferreds at 6.875% (reset CMT5 +2.89%).
- A second money-center bank issued $2.5 billion of Baa2/ BBB- $1,000 par perpetual non-call 5 preferreds at 6.25% (reset CMT5 +2.351%).
- A regional bank brought $400 million of Baa3/BB+ $25 par perpetual non-call 5 preferreds at 6.50% (reset CMT5 +2.629%).
These deals were well absorbed by the market, reflecting both the diversity of issuers and the ongoing appetite for yield and income.
Second-quarter earnings confirmed the resilience of the US banking sector. Net interest income (NII) generally trended upward, with several banks raising full-year NII guidance. Margin expansion was supported by fixed-asset repricing, modest loan growth and easing deposit cost pressure. Regional banks reported average loan growth of about 1% quarter over quarter, with commercial and industrial portfolios leading the way. Some banks saw sequential loan growth of 2% or more, partly driven by businesses accelerating inventory builds in anticipation of tariffs.
Credit quality remained stable or improved, with net chargeoffs and nonperforming asset ratios generally flat or declining. Allowance levels were largely unchanged or slightly reduced, and banks continued to proactively manage riskier segments, especially office commercial real estate, with no signs of systemic deterioration. Capital positions remain robust, with most banks operating well above regulatory minimums and several announcing or executing share repurchases.
Management teams remain optimistic for the second half of 2025, expecting continued NII growth, stable credit and capital flexibility to support higher payouts and selective loan growth.
The macro backdrop softened notably in July. Payrolls rose just 73,000 with large downward revisions to May and June. The unemployment rate ticked up to 4.2%, and labor force participation fell to 62.2%, with immigration restrictions likely contributing to the decline. While the rise in unemployment remains within the past year’s range, the slower pace of job creation keeps downside risks elevated. Federal Reserve chair Jerome Powell has emphasized the unemployment rate as a key metric. Another employment report is due before the September 17 FOMC meeting, where markets are now pricing in a rate cut.
The fiscal backdrop is also shifting. The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, introduces $3.4 trillion in tax cuts and spending over ten years, with an additional $700 billion in interest costs. Despite its size, the bill hasn’t triggered a meaningful reaction in the Treasury market. The muted response reflects several factors: Much of the bill extends existing provisions, and new tariff revenues (estimated at $2.8 trillion over 10 years) are projected to help offset the fiscal impulse. The Fed has maintained a restrictive posture and an easing bias, with Powell stating that the bill is “not particularly stimulative” at the July FOMC meeting. However, long-term risks remain. Debt-to-GDP ratios are projected to exceed 120% by 2035, and term premium models suggest a potential 70 to 80 basis point upward drift in long-term yields. The risk of a “Liz Truss moment”—a sudden market repricing due to fiscal complacency—can’t be ignored.
Looking ahead
As we enter the final stretch of summer, preferreds are navigating a more complex macro and regulatory landscape. Disinflation trends have stalled with tariff uncertainty. Labor market softness and fiscal uncertainty are shifting the policy outlook. The Fed’s easing bias is now paired with market expectations for a September rate cut, while the OBBBA’s muted fiscal impulse and rising tariff revenues are helping contain long-end yields for now.
Bank fundamentals remain strong, and capital distributions are likely to increase in Q3 and Q4. We wouldn’t be surprised to see more calls and refinancing from the 2020 vintage of preferred issuance. Political risks, including rhetoric on Fed independence, fiscal spending and tariff-led inflation, may lift term premia and support demand for income-generating hybrids. We continue to favor callable fixed-to-floating structures with qualified dividend income treatment for taxable investors, particularly in the bank and utility sectors. High yields, stable credit and supportive technicals should continue to attract investor demand, positioning preferreds for continued strength in the months ahead.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
ABOUT
Parametric Portfolio Associates LLC (“Parametric”), headquartered in Seattle, is registered as an investment advisor with the US Securities and Exchange Commission under the Investment Advisers Act of 1940. Parametric is a leading global asset management firm, providing investment strategies and customized exposure management directly to institutional investors and indirectly to individual investors through financial intermediaries. Parametric offers a variety of rules-based investment strategies, including alpha-seeking equity, fixed income, alternative and options strategies. Parametric also offers implementation services, including customized equity, traditional overlay and centralized portfolio management. Parametric is part of Morgan Stanley Investment Management, the asset management division of Morgan Stanley, and offers these capabilities through offices located in Seattle, Boston, Minneapolis, New York and Westport, Connecticut.
DISCLOSURES
This material may not be forwarded or reproduced, in whole or in part, without the written consent of Parametric. Parametric and its affiliates are not responsible for its use by other parties.
This information is intended for informational purposes and details investment strategies and opportunities identified by Parametric. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. Past performance is not indicative of future results. Investing entails risk, and there can be no assurance that Parametric will achieve profits or avoid incurring losses. Preferred securities are subject to interest rate risk. They generally decrease in value if rates rise and increase in value if rates fall. Parametric and Morgan Stanley do not provide legal, tax or accounting advice or services. Clients should consult with their own tax or legal advisor prior to entering into any transaction or strategy described herein. Additional information is available on request.
Charts, graphs and other visual presentations and text information were derived from internal, proprietary or service vendor technology sources or may have been extracted from other firm databases. As a result, the tabulation of certain reports may not precisely match other published data. Data may have originated from various sources, including, but not limited to, Bloomberg, MSCI/Barra, FactSet or other systems and programs. Parametric makes no representation or endorsement concerning the accuracy or propriety of information received from any third party.
Source of all data: Bloomberg, 2/28/2025. Bloomberg is a trademark and service mark of Bloomberg Finance LP (“Bloomberg”). “Barclays” is a trademark and service mark of Barclays Bank Plc, used under license. Bloomberg Finance LP and its affiliates (collectively “Bloomberg”) or Bloomberg’s licensors own all proprietary rights in the Bloomberg Barclays indexes. Neither Bloomberg nor Barclays Bank Plc or its affiliates (collectively “Barclays”) guarantees the timeliness, accuracy or completeness of any data or information related to the Bloomberg Barclays indexes. This strategy is not sponsored or endorsed by Bloomberg or Barclays, and each makes no representations regarding the content of this material.
References to specific securities and their issuers are for illustrative purposes only and are not intended to be and should not be interpreted as a recommendation to purchase or sell such securities. Any specific securities mentioned are not representative of all securities purchased, sold or recommended for advisory clients. Actual portfolio holdings vary for each client, and there is no guarantee that a particular client’s account will hold any or all of the securities identified. It should not be assumed that any of the securities or recommendations made in the future will be profitable or will equal the performance of the listed securities.
All contents ©2025 Parametric Portfolio Associates LLC. All rights reserved. Parametric Portfolio Associates® and Parametric® are trademarks registered in the US Patent and Trademark Office and certain foreign jurisdictions.
Parametric is located at 800 Fifth Avenue, Suite 2800, Seattle, WA 98104. For more information regarding Parametric and its investment strategies, or to request a copy of the firm’s Form ADV or a list of composites, contact us at 206 694 5500 or visit www.parametricportfolio.com.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. INDEX PERFORMANCE IS SHOWN FOR ILLUSTRATIVE PURPOSES ONLY AND NOT MEANT TO DEPICT THE PERFORMANCE OF A SPECIFIC INVESTMENT. NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE | NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY | NOT A DEPOSIT
© Parametric
Read more commentaries by Parametric
