LDP's Yield Attractiveness in a Lower-Rate Environment

The Federal Reserve's December 2025 rate cut, the third in as many months, has cemented the onset of a near-term easing cycle, with the federal funds rate now at 3.50%-3.75%-its lowest level since 2022. According to the Fed's updated Summary of Economic Projections, one additional rate cut is anticipated in 2026, with officials projecting the terminal rate will remain at 3.25%-3.5% by year-end. This policy trajectory, coupled with inflation easing to 2.4% in 2026 and GDP growth accelerating to 2.3%, creates a favorable backdrop for income-oriented investors seeking assets that thrive in a lower-rate environment. Among these, the Cohen & Steers Limited Duration Preferred and Income Fund (LDP) stands out as a strategically positioned vehicle, leveraging the unique characteristics of preferred securities to capitalize on the Fed's accommodative stance.

Strategic Positioning of Preferred Securities

Preferred securities, which form the core of LDP's portfolio, offer a compelling yield premium over similarly rated bonds. As of recent reports, LDP delivers a yield range of 7.2%-7.85%, significantly outpacing the returns of traditional fixed-income alternatives. This attractiveness is amplified in a Fed easing cycle, as preferred securities-often issued by banks and utilities-tend to perform well when discount rates decline. Their fixed dividend structures and shorter durations make them less sensitive to interest rate volatility compared to longer-dated bonds, a trait that aligns with LDP's "limited-duration" investment strategy.

Moreover, LDP's use of leverage-common in closed-end funds-enhances its yield profile. By borrowing at lower short-term rates and deploying capital into higher-yielding preferred shares, the fund amplifies returns for shareholders. This strategy gains traction as the Fed's rate cuts reduce the cost of leverage, improving net asset value (NAV) growth potential. However, LDP currently trades at a discount to NAV, ranging between 3.41% and 11%, presenting an added layer of value for investors willing to tolerate the discount's volatility.

Fed Policy and Market Dynamics

The Fed's cautious approach to further cuts-emphasizing a "wait-and-see" stance-introduces uncertainty but also underscores the durability of the easing cycle. Chair Jerome Powell's remarks that the current rate is "in a broad range of estimates of neutral value" suggest a potential pause in 2026, yet he also highlighted "significant downside risks" to the labor market, keeping the door open for additional cuts. For LDP, this environment is advantageous: preferred securities often rally when rate cuts are anticipated, as their prices rise in response to lower discount rates. The fund's focus on shorter-duration holdings further insulates it from prolonged rate hikes, a scenario the Fed has explicitly ruled out for now.

Risks and Considerations

While LDP's structure is well-suited to a lower-rate environment, investors must remain mindful of risks. A sudden tightening of monetary policy-though deemed unlikely by the Fed's SEP-could pressure preferred securities, which are more sensitive to rate spikes than bonds. Additionally, the fund's discount to NAV could widen if market sentiment shifts, particularly if broader equity markets weaken. However, given the Fed's commitment to easing and the current economic outlook, these risks appear secondary to the fund's strategic advantages.

Conclusion

In a Fed easing cycle, where the search for yield remains paramount, LDP's focus on preferred securities offers a unique combination of income generation and capital preservation. Its limited-duration strategy, leverage, and current NAV discount position it to outperform both traditional bonds and preferred stock ETFs as rates trend lower. As the Fed signals one more cut in 2026 and maintains a neutral policy stance, LDP represents a tactical allocation for investors seeking to harness the tailwinds of a decelerating rate environment.