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Effect of interest rates rise on preferred stocks
02-05-2014, 07:11 PM. (This post was last modified: 02-05-2014, 07:11 PM by gzbkel.)
Post: #1
Effect of interest rates rise on preferred stocks
I read this article that talks about the effect of rising interest rate on preferred stocks in the US.
Link
Basically, preferred stocks dropped sharply when the 10-Year Treasury Note Yield rose from a low of 1.65% to a high of 2.78% last May. I can understand that, since preferred stocks behave similarly to bonds.
Likewise, REITs are sometimes described as having bond-like characteristics, and the rise in 10 year SGS yield last May caused all the S-REITS to drop significantly.
However, I am puzzled by how preferred stocks in Singapore seems unaffected by rise in interest rates.
For example, if we look at DBS Bk 4.7% NCPS, the drop in 2013 May is not that much more than other ex-dividend dates. (There is a bigger drop this March, but I think that is due to the fear of early redemption by DBS) Chart

Same for Hyflux 6% CPS. Chart

Am I missing something here?

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02-05-2014, 09:45 PM. (This post was last modified: 02-05-2014, 09:45 PM by AlphaQuant.)
Post: #2
RE: Effect of interest rates rise on preferred stocks
(02-05-2014, 07:11 PM)gzbkel Wrote: However, I am puzzled by how preferred stocks in Singapore seems unaffected by rise in interest rates.
For example, if we look at DBS Bk 4.7% NCPS, the drop in 2013 May is not that much more than other ex-dividend dates.

Some of the preference shares issued by the banks have a callable date (somewhere in 2018-2020 if i remember right) - so the banks have the right to redeem them at par on/after the call date.

So the market is somewhat pricing these as 5-7yr bonds as the bet is on the banks to redeem them. Since the duration is relatively short, the pv01 (sensitivity to rates) is lower hence the drop is relatively muted compared to an actual perp.

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03-05-2014, 08:50 AM.
Post: #3
RE: Effect of interest rates rise on preferred stocks
Hi AlphaQuant, thank you for sharing your thoughts on this.
The DBS 4.7% is callable at 2020, while the Hyflux 6.0% is callable at 2018 so you could be right.

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