View from the Observation Deck

1. The chart shows that the August 2012 month-end yield on the Merrill Lynch U.S. Preferred Stock Fixed Rate Index (6.45%) was actually below where it was at the close of August 2004 (6.49%).
2. While the distribution levels are similar, the backstories are far from it. Let's begin with Fed monetary policy. Keep in mind, the Fed has stated it is prepared to keep rates low into 2014 if warranted.
3. As we speak, the Federal Reserve is contemplating a third round of quantitative easing (QE3). In August 2004, it was two months into a two-year tightening phase in which it had already raised the federal funds target rate 50 basis points.
4. The spread between the yield on the Merrill Lynch U.S. Preferred Stock Fixed Rate Index and the benchmark 10-Year T-Note favors present day. The spread was 237 basis points on 8/04, compared to 490 basis points on 8/12.
5. Historically speaking, if you remove the 2008 financial crisis, a yield spread of 250 basis points would normally be the high-side of a 100-250 basis point range. Today, it is nearly double the high-side.
6. Inflation is lower today. The CPI Headline rate was 2.7% in August 2004, nearly double the 1.4% rate posted in July 2012, according to the Bureau of Labor Statistics.
7. The Merrill Lynch U.S. Preferred Stock Fixed Rate Index is comprised of investment grade securities, yet, due to the fallout from the financial crisis, the yield closed August 69 basis points above the yield on the Merrill Lynch BB, 7-10 Year Index.
8. We believe those investors seeking high taxable current income from investment grade securities should consider preferred securities in the current climate.