Author Topic: Preferred Equity Leveraged Trade  (Read 2060 times)

tooqk4u22

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Preferred Equity Leveraged Trade
« on: December 19, 2012, 12:51:15 PM »
I am very tempted to use my HELOC (2.75%) to invest in PFF (5.75% yield) - that is not bad arbitrage.

It is pretty safe to say that interest rates won't be rising any time soon - not for two years probably.  On the other hand I feel when they do rise it will be fast. Interestingly though when the fed did operation twist the yields only came in slightly so the spread between preferreds and 10 year treasury is pretty wide right now. 

Preferreds might be a bit rich right now as everyone is looking for yield but it seems like a decent play for about a year.

FWIW - I have invested in preferreds and still do so I like them and understand them but never did invested in them like this or a big way. 

Any thoughts on this.

ivyhedge

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Re: Preferred Equity Leveraged Trade
« Reply #1 on: January 07, 2013, 11:28:01 AM »
I am very tempted to use my HELOC (2.75%) to invest in PFF (5.75% yield) - that is not bad arbitrage.

It is pretty safe to say that interest rates won't be rising any time soon - not for two years probably.  On the other hand I feel when they do rise it will be fast. Interestingly though when the fed did operation twist the yields only came in slightly so the spread between preferreds and 10 year treasury is pretty wide right now. 

Preferreds might be a bit rich right now as everyone is looking for yield but it seems like a decent play for about a year.

FWIW - I have invested in preferreds and still do so I like them and understand them but never did invested in them like this or a big way. 

Any thoughts on this.

Happy to discuss with you offline but, suffice it to say that will be dealing with a basket of preferreds whose individual characteristics, only an agglomerate thereof, are unknown to you. If you were interested in laddering preferred and other exchange traded products up the capital structure a good case could be made for careful exposure and a model built to minimize volatility and your exposure characteristics.

However, the correlation of PFF and several of its cousins (including the international offerings) to the S&P500 is very high, often with volatility an *order of magnitude* higher than highly rated individual issues. And while some vehicles exclude financials, there are none that let you "toggle" between cumulative issues, for example, or specific ratings to satisfy your risk-return demands. Finally, you cannot shop for par or <par issues, which is oft dear to the exchange traded debt investor - especially given the frazzled nature of the current market debt markets.

ETFs can be extremely useful in myriad situations. However, if you're interested in using preferred-type issues, the literature regarding how to pick them systematically is expansive. Consider getting into it slowly rather than buying a catch-all ETF in this case ... The reward of mitigated stress will be worthwhile, in my opinion. 

tooqk4u22

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Re: Preferred Equity Leveraged Trade
« Reply #2 on: January 07, 2013, 11:44:10 AM »
ivy - all your points are pretty much the reason that I have never invested in PFF (or like) and only have invested in a few individual ones, and really have sold out of most of those point because I think they are too rich.

Like I said, I feel rates will be going up and when they do it will be fast but probably two years away and I was trying to justify the risks of the underlying pool and rates with the short duration - not really worth it though from a risk return perspective.

arebelspy

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Re: Preferred Equity Leveraged Trade
« Reply #3 on: January 07, 2013, 05:37:14 PM »
I got a buddy who took out a HELOC and bought a condo and 3 houses here in Vegas in the last two years.  It's not a bad way to go, with rates so darn low.
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