Preferreds Weekly Review: AGNC Follows NLY With A Fixed-Rate Offering

Preferred stocks delivered strong returns in the first week of September, buoyed by healthy income levels and falling yields amid tight sector credit spreads. Notably, AGNC issued a new fixed-rate preferred at 8.75%, offering a higher coupon than NLY.PR.J. In contrast, Farmer Mac's new Series H preferred is viewed as less appealing due to negative convexity risk at similar yield levels.

Analysis

The preferred stock market demonstrated strong performance during the first week of September, buoyed by a favorable environment of healthy income generation, falling yields, and tight sector credit spreads. Within this context, new issuance activity revealed divergent opportunities for investors. AGNC Investment Corp. launched a new fixed-rate preferred security with an 8.75% coupon, which is presented as an attractive option for those seeking fixed-rate exposure, particularly as its coupon exceeds that of comparable issues like Annaly Capital Management's NLY.PR.J. Conversely, the new Series H preferred from Federal Agricultural Mortgage Corporation (Farmer Mac) is deemed less compelling. The analysis indicates its yield is insufficient to compensate for inherent negative convexity risk, suggesting that similar yields can be sourced from the company's existing series without this specific risk profile.

Key Decisions for Investors

• Investors seeking high, fixed-rate income could consider AGNC's new 8.75% preferred issue, which is positioned as a more attractive opportunity compared to certain existing peer securities.
• Exercise caution with Farmer Mac's new Series H preferred, as its yield may not sufficiently compensate for the stated negative convexity risk, and better risk-adjusted returns might be available in its existing issues.
• Given that recent market strength is partially attributed to falling yields, investors should monitor interest rate trends, as a reversal could negatively impact the valuation of fixed-rate preferred securities.
• The diverging quality of new issues from AGNC and Farmer Mac underscores the need for security-specific analysis rather than relying solely on broad positive trends in the preferreds market.