JPMorgan Chase & Co.’s recent $3 billion preferred shares issuance has ignited a flurry of activity in the credit markets, highlighting the growing appeal of high-coupon securities. The bank’s offering, featuring a 6.5% coupon, attracted significant investor interest, underscoring a broader trend in the fixed-income landscape.
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Sales desks actively marketed the new preferred shares to investors holding older, lower-yielding securities, facilitating switches into the higher-coupon offering. This strategy proved successful, with JPMorgan’s issue becoming the most heavily traded among US corporate bonds and preferreds this week, exceeding $10 billion in orders. The volume reflects the largest preferred deal by a US lender in four years.
Trading activity chart for JPMorgan's preferred shares.
The Allure of Carry in a Low-Yield Environment
The robust demand for JPMorgan’s preferred shares underscores the increasing importance of “carry,” or coupon income, in the current market environment. With risk premiums compressed and interest rate cuts largely priced in, coupons have emerged as a primary source of returns for fixed-income investors.
This dynamic has fueled demand for high-yielding securities like US bank preferreds and European AT1 bonds. These instruments, designed to meet regulatory capital requirements, offer attractive coupons due to their subordinate position in the capital structure, making them more sensitive to potential losses.
Chart comparing yields of different fixed-income securities.
Refinancing and the Coupon Reset Dynamic
JPMorgan’s $3 billion issuance coincided with the repayment of a $3 billion preferred security carrying a 4.6% coupon. This illustrates a common practice among banks: replacing older, lower-yielding preferreds with new issues to manage capital costs. Preferreds often have fixed-rate dividend periods that eventually reset to floating rates. In the current rising rate environment, these resets would lead to significantly higher borrowing costs for banks, making refinancing an attractive option.
Had JPMorgan opted to extend the maturing security, the initial floating coupon would have reset to approximately 7.4%. By issuing new preferreds at 6.5%, the bank effectively managed its cost of capital.
A Broader Trend in the Banking Sector
Other major banks have also engaged in similar refinancing activities. Citigroup Inc. recently issued preferreds with a 6.75% coupon, replacing a note with a coupon approximately 2 percentage points lower. Goldman Sachs Group Inc. offered a 6.85% coupon in its latest preferred issuance. These examples highlight a broader trend of rising coupons in the preferreds market.
Chart showing trend of rising coupons in preferred securities.
Balancing Capital Requirements and Investor Demand
While the current market favors refinancing, banks may not choose to replace all outstanding preferred shares. After years of accumulating regulatory capital, recent indications suggest that the final Basel Endgame rules may be less stringent than anticipated. Consequently, some banks might opt to reduce their preferred capital layer by repaying existing notes without issuing new ones.
However, for banks seeking to optimize their capital structure and tap into investor demand for yield, preferred share issuances with attractive coupons are likely to continue attracting strong interest. The search for yield in a low-return environment makes these securities a compelling investment for those seeking reliable income streams. This preference for higher coupons is particularly pronounced among US investors, who prioritize income generation in their fixed-income allocations.
