September 2025: Opportunities Down the Capital Structure: Elevated Yields in High-Quality Credits

In an environment where traditional investment-grade (IG) bonds continue to offer modest spreads, we are increasingly finding value further down the capital structure. Hybrid and preferred securities have emerged as compelling instruments, pairing the credit strength of well-capitalized issuers with elevated income streams that rank senior to common equity yet subordinate to senior debt. While these securities carry structural nuances and liquidity considerations, they offer an opportunity to enhance portfolio yield while remaining anchored to fundamentally strong balance sheets.

Looking across our investable universe, we can see that long duration IG spreads have rallied significantly within the last several months (figure 1). However, preferred spreads have meaningfully decompressed vs IG over the same period (figure 2). Within this diverse preferred asset class, structures vary widely, warranting a fresh look at positioning and preferences.

The opportunity we highlighted in prior years—fixed-to-float preferreds with large back-end resets—has played out as we expected, as a large portion of investment grade rated preferreds with back-end resets at or above treasuries +380 have been called over the last 12 months. We expect the amount of outstanding preferred paper with high back-end resets to continue to decline.