U.S. flags hang at the New York Stock Exchange in Manhattan. Photo: Reuters, Andrew Kelly

Bank preferred stock is a favorite vehicle for income investors in a low-yield environment, but three factors could make this market volatile during the next several months, Goldman Sachs analysts warned in a June 5 note. These are 1) regulatory changes, 2) high issuance volume, and 3) high name concentration. GS explains:

More cautious on US banks ahead of 2Q, name concentration

Issuance has been a major theme for the global bank sector YTD although it could fall off in June ahead of possibly weaker-than-expected 2Q earnings and as volatility becomes more likely amid the UK election, speculation about the Italian election and some idiosyncratic bank situations in Europe.

We have seen $146.7bn of issuance in US$ YTD from companies under coverage, of which $57.6bn has been issued by European banks. Over the past month we have seen $13.8bn of US$ issuance by Yankee banks and we expect this trend to continue in the next week or so given tighter spreads and still strong demand from US investors that have been underweight the sector.

However, we would caution that volatility may pick up this month too on the back of the UK election on Thursday and the Italian local elections on June 11. While we remain Attractive on European banks, we are selective by name and part of the capital structure; within US banks, we are slightly more cautious generally on spread tightening potential due to possible repeal of some stringent regulatory rules, ongoing issuance and high name concentration.”