At the first call date, the bond yields 2.175 percentage points more than the five-year Treasury rate.
Last week, the narrowest preferred-stock pricing since the financial crisis was recorded by Bank of New York Mellon Corp, as tight credit spreads/) push yield-seeking investors toward higher-risk assets. That bank issued $500 million in preferred equity on Thursday, featuring a reset spread of 1.868 percentage points - the smallest ever recorded for that particular preferred share structure.
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American banks issue preferred shares to meet part of their capital needs. When reset spreads are lower, lenders have weaker motivation to call the securities later, which increases investor uncertainty.
Preferred securities sit between debt and equity in the capital structure, offering investors higher yields in exchange for added risk. The reset spread essentially determines the interest rate after the first call date; a lower spread reduces the cost for the bank if it chooses to keep the issue outstanding. According to a market analyst, "The recent tightening in spreads reflects strong demand for yield in a low-rate environment, as well as improved bank creditworthiness."
Goldman's decision to issue now, after a long hiatus, suggests the bank sees favorable conditions to lock in low-cost capital. The proceeds will replace a more expensive $750 million issue, trimming future funding expenses. For investors, the slim spreads imply they are accepting lower compensation for the risk of perpetual securities, potentially leading to greater price volatility if interest rates shift.
The aggressive hunt for yield across credit markets has compressed preferred spreads to historic lows, with banks eager to refinance older, costlier notes. Yet the perpetual nature of these instruments means that any change in interest rates or credit conditions could sharply alter their market value, a risk that income-focused buyers must weigh.
Preferred shares occupy a unique spot in banks' capital stacks, often counting as Additional Tier 1 capital under Basel III rules. This allows lenders to strengthen their capital ratios without issuing common equity, which can dilute existing shareholders. The recent wave of preferred issuance, including Goldman's, reflects both the low cost of funding and the need to maintain robust capital levels ahead of potential regulatory changes.
The BNY Mellon deal's record-low reset underscores the intensity of the hunt for yield across credit markets. This dynamic is particularly significant because preferred stock functions as a hybrid instrument: it counts toward bank capital but also offers regular dividends, making it attractive to income-focused investors who are willing to accept subordinate status relative to bondholders. Banks, in turn, value the flexibility of perpetual notes that can be called or left outstanding depending on market conditions.
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