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(Bloomberg) -- JPMorgan Chase & Co.’s big preferred shares issue this week put sales desks into top gear. Their pitch was simple: a significant coupon jump — something that’s made the junior securities one of the hottest trades in credit.
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Salespeople scouting prospective buyers for the $3 billion issue touted the 6.5% coupon, also known as carry, on the preferreds. Brokers targeted owners of older securities with lower coupons, including those issued by JPMorgan, to arrange switches into the new shares, according to people familiar with the matter, who asked not to be named because discussions were private.
It worked. The issue was the most heavily-traded among US corporate bonds and preferreds this week. Market activity peaked at multiple trades per minute of the shares after the issue, based on data compiled by Bloomberg. That’s after the bank got more than $10 billion in orders for the sale, which was the biggest preferred deal by a US lender in four years.
Investors flocked to the sale because carry has become vital in credit. With risk premiums compressed near historic lows and a relatively tame interest rate-cutting cycle priced in, coupons have become the only reliable source of returns. That’s made US bank preferreds and Europe’s AT1 bonds increasingly popular. The securities help banks meet regulatory requirements and are able to offer big coupons because they’re the first in line for losses when a bank gets into trouble.
“The real story in the preferred market is the continual growth of coupon income despite a central bank easing regime,” said Manu Krishnan, deputy chief investment officer at Spectrum Asset Management. He said securities issued during times of lower interest rates will either get called or extended at much higher coupons, putting the asset class in “the unique position” of being able to boost coupons.
While this is also the case for corporate bond refinancings, the extra coupon for borrowers is typically a lot smaller than in these preferreds.
For banks, replacing older preferreds with new issues is a way to manage the cost of their capital stack. JPMorgan’s $3 billion sale came just after it announced that it would repay an older $3 billion security with a 4.6% coupon. Preferreds often have periods where their dividends are fixed, which then reset to floating rates. Those resets will usually be to higher yields now, boosting the bank’s borrowing costs more than if they chose to call the securities and sell new ones.