Investors in trust-preferred securities are keeping a firm hand on their issues, in spite of last week's interest rate hike and the fear of further rate increases this year.
Bond analysts and traders said that investors are less likely to sell these securities, which are hybrid debtlike issues, because they still offer better yields than other corporate securities.
Eric J. Grubelich, a bank bond analyst with Keefe Bruyette & Woods, noted that spreads-the gap between Treasuries and bank corporate bonds-on trust-preferred securities have widened by 3 to 5 basis points in the past two weeks.
Investors believe that "there is still spread value in trust-preferreds, so they might not be pitching them out of the portfolio," said Mr. Grubelich.
The equity and bond markets have swooned since Federal Reserve Chairman Alan Greenspan raised short-term interest rates by 25 basis points last week. The coupon on a 30-year Treasury continues to hover above 7%.
Michael Buchanan, a bond trader with Conseco Capital Management in Carmel, Ind., also noted that holders of trust-preferred securities are standing by their investments.
"If people don't feel comfortable about corporate securities, then they will sell things that don't offer as much yield," he said. "We believe that trust-preferred securities will be one of the latter securities to" be sold from portfolios.
Mr. Buchanan said that the spreads on trust-preferred securities continue to be tight because they are callable securities, or bonds that can be redeemed by the issuer before maturity.
"When the Treasury market is trading off, these kinds of securities tend to hang in there," said Mr. Buchanan, who helps oversee $30 billion in bonds. "Spreads on callable securities will outperform in a down market. This is not unexpected."
Yet trader Donald Whitmore of UBS Securities pointed out that trust- preferred securities are trading no differently than other corporates.
"We have seen more erosion today in the sector," said Mr. Whitmore. "And in spite of their call feature, trust-preferred securities trade like bullets because many people do not think they that will be called."
Mr. Buchanan noted that there is a spread differential between higher rated trust-preferred securities and lower rated ones. Some of the spreads on the lower rated ones gotten as wide as 10 basis points, he said.
Mr. Buchanan is doubtful that spreads on trust-preferred securities will widen much more, even if Friday's unemployment numbers suggest stronger- than-expected growth in the economy.
The only thing that would move spreads substantially is "if a real positive number comes out for the bond market," he said. "That would encourage people with higher cash positions to put some of that money to work."
