Following a solid performance throughout 2025, the preferred market entered 2026 with strong momentum, characterized by positive returns in the first two months of the year. While the first quarter introduced a brief period of geopolitical volatility, the preferred market’s swift recovery and underlying fundamental strength highlight why we remain constructive on the asset class for the remainder of 2026.

A Market Built on Resilience

While the S&P 500 Total Return Index experienced a sharp 8.9%¹ peak-to-trough decline during the March volatility, the preferred market held up significantly better with only a 2.9%² peak-to-trough decline. By April, investors looked past temporary energy shocks, and the preferred market recovered nearly all March losses. This resilience is anchored by a U.S. economy that, while moderating to a projected 2.0%³ GDP growth, remains stronger than most other large global economies.

Fundamental Strength: The Banking Sector “Fortress”

The credit environment for our core issuers—major financial institutions—is exceptionally robust:

• Strong Loss Absorption: Bank capital levels and allowances for loan losses provide a formidable buffer against economic slowdown.
• Improving Credit Metrics: Commercial office and multifamily loan delinquencies at large U.S. banks are currently declining, and these specific portfolios continue to shrink.
• Healthy Margins: Net interest margins (NIM) remain healthy, ensuring that banks are well-prepared to manage through the current “neutral to restrictive” interest rate environment.
• Corporate Health: Outside of financials, nonfinancial corporate balance sheets are similarly healthy, with rising liquidity and cash flows.
• Limited Exposure to Private Credit: Bank and insurance companies are two of the largest issuers in the preferred market, and both have limited exposure to private credit markets. In aggregate, loans to private credit funds and other non-depository financial institutions (NDFIs) represent a relatively small portion of bank balance sheets. Similarly, insurance company portfolios have limited investments into private credit funds.

The AI “Arms Race” and New Preferred Market Issuance

The rapid adoption of AI is not just a tech story; it is also a renaissance for energy infrastructure. The massive AI data center build out will demand additional energy resources. Energy and utility companies have been increasing debt issuance to support the necessary capital expenditures.

• Hybrid Diversification: Robust hybrid issuance from energy and utility companies is adding valuable diversification and attractive income structures.
• Attractive Yield: Even though many of the new hybrid issues are rated as Investment-Grade, they offer attractive incremental yield over comparable senior debt of an issuer, attracting both Investment-Grade and High Yield buyers.

Favorable Supply Technicals

Supply dynamics continue to act as a natural tailwind for valuations. Bank supply remains structurally limited as firms rely on high retained earnings rather than new issuance. Furthermore, recent proposals regarding bank capital requirements could further reduce the need for new preferred stock, creating a “scarcity premium” for existing holders.

Brompton’s Approach

US Preferreds are liquid, have high credit quality on average, and offer yields that are higher than Canadian Preferreds and Investment-Grade Bonds. Brompton Flaherty & Crumrine Investment Grade Preferred ETF (BPRF, BPRF.U) and Brompton Flaherty & Crumrine Enhanced Investment Grade Preferred ETF (BEPR) offer Canadian investors an attractive way to invest in the US Preferred share market with the benefit of active management by the longest tenured US preferred share specialist, Flaherty & Crumrine Incorporated.