High-Yield Strategies in a Rising Rate World: Why PTA and Preferred Funds Face Long-Term Valuation Risks

The past two years have tested the resilience of high-yield income strategies in a rapidly shifting interest rate environment. As central banks aggressively raised rates to combat inflation, preferred securities and income funds—long favored for their steady distributions—have faced mounting valuation pressures. The Cohen & Steers Tax-Advantaged Preferred Securities and Income Fund (PTA) serves as a compelling case study, illustrating how rising rates can erode asset values, compress income sustainability, and disrupt market performance.

The Mechanics of Valuation Compression

Rising interest rates directly impact the valuation of income-generating assets through higher discount rates. For private equity and preferred securities, this means future cash flows are worth less in present value terms. According to a report by Wellington Management, steeper discount rates have depressed valuations across private equity portfolios, with leveraged buyout strategies particularly vulnerable due to their reliance on debt financing [2]. PTA, which holds a portfolio of preferred securities and leveraged loans, faces similar challenges. As of August 2025, the fund trades at a 5.26% discount to its net asset value (NAV), reflecting investor skepticism about the sustainability of its 8.11% distribution rate in a high-rate environment [1].

The fund’s leverage—34.31% of total assets—amplifies these risks. While leverage can enhance returns in stable markets, it magnifies losses when asset values decline. With interest rates locked at multi-decade highs, the cost of servicing this debt has risen sharply, squeezing margins and reducing the flexibility to reinvest in higher-yielding opportunities [1].

Income Sustainability Under Pressure

PTA’s distribution pattern underscores the fragility of high-yield strategies in a rising rate environment. The fund’s 8.11% yield, while attractive, is partially supported by return of capital and realized gains rather than consistent net investment income [1]. This structure becomes problematic when underlying assets face valuation declines. For instance, the fund’s 12-month total return of 9.43% on NAV masks a broader trend: as discount rates rise, the present value of future cash flows from its holdings diminishes, threatening the long-term viability of its payouts [1].

The broader market for preferred securities reinforces this dynamic. A McKinsey analysis notes that private equity strategies reliant on debt financing have seen deal activity decline, as higher borrowing costs make leveraged transactions less attractive [3]. PTA, which invests in similar risk profiles, must now navigate a landscape where refinancing is costlier and exit opportunities are scarcer.

Market Performance and Investor Behavior

PTA’s recent price movements reflect a tug-of-war between income-seeking investors and valuation concerns. Despite a 9.43% total return on NAV over the past year, its share price has traded as low as $17.40—a 15% discount to its 52-week high of $21.28 [1]. This volatility highlights the fund’s sensitivity to macroeconomic shifts. When the Federal Reserve signaled its intent to maintain high rates through 2025, PTA’s discount widened, signaling investor caution about its ability to sustain distributions [1].

The fund’s 4.92% expense ratio further compounds these challenges. In a low-margin environment, high fees can erode returns, particularly when asset values are compressed. For income-focused investors, this creates a dilemma: the allure of an 8.11% yield must be weighed against the risk of distribution cuts or principal losses if valuations continue to decline [1].

Implications for the Broader Market

PTA’s experience is emblematic of a larger trend. A CF Insights report notes that private markets, including preferred funds, have become less correlated with public equity benchmarks due to their longer valuation cycles [2]. However, this insulation is limited in a high-rate environment. As discount rates rise, even private assets face downward pressure, forcing managers to prioritize operational improvements over speculative growth [3].

For investors, the lesson is clear: high-yield strategies must be evaluated through a lens of risk-adjusted returns. While PTA’s 8.11% distribution remains competitive, its long-term sustainability hinges on the ability to navigate a landscape where rising rates compress valuations and increase borrowing costs.

Conclusion

The interplay between rising interest rates, valuation mechanics, and income sustainability has placed high-yield strategies like PTA under scrutiny. While these funds offer attractive yields, their long-term performance depends on the ability to adapt to a higher-rate world. For investors, the key takeaway is to balance income generation with a realistic assessment of valuation risks—a lesson that PTA’s recent trajectory underscores with clarity.

**Source:[1] Cohen & Steers Tax-Adv Prd Sec and Inc:PTA [https://www.cefconnect.com/fund/PTA][2] Impact of higher interest rates on private equity [https://www.wellington.com/en-us/institutional/insights/impact-of-higher-interest-rates-on-private-equity][3] Global Private Markets Report 2025 [https://www.mckinsey.com/industries/private-capital/our-insights/global-private-markets-report]