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Let The Beatings Continue

Equities are soft this morning with the S&P500 off about 1/2%. Seems global problems are contributing to the softness with a Chinese company (Evergreen) filling for bankruptcy. Investors continue to have plenty of options to sock money away in safe stuff paying a decent yield.

The 10 year treasury yield is trading at 4.22% right now which is off 8 basis points from the close yesterday–maybe we will see a little rally in income issues today–I think my accounts are off 4 or 5 days in a row–not by giant amounts but enough.

A topic that is getting lots of press is mortgage rates – obviously they are moving higher. Inventories of for sale properties continues to move lower – who the hell wants to trade in a 3% mortgage for a 7 or 7.5%? We are back to the ‘haves’ versus ‘have nots’. The wealthier folks can do anything they please–they are paying cash and they are the ones most active in the market – and honestly the prices they are paying are in many times ridiculous, but it is the market. The area I think is due to be pummeled is the apartment construction area – just too much activity and there is no way at ever rising interest rates that these make sense. I am guessing there are some small community banks that are getting themselves in trouble with these loans, but these issues take years to play out so immediately we won’t see it play out, but these loans will come home to roost.

Today I am looking at an addition to my Affiliated Managers Group 5.875% baby bond (MGR). This one has caused me the most pain this week and is now trading at $21.32 it is sporting almost a 6.9% current yield. This is a very attractive price for a investment grade asset manager–highly likely I will buy more today unless it bounces strongly at the open. My current holdings have an average price of $22.82 so I will get that dropped down a bit.

No real economic releases on the schedule for today.

18 thoughts on “Let The Beatings Continue”

  1. I don’t see much about MBS on this board, but since Tim’s note mentions mortgage rates I though I would share.

    I have been tracking the TBA Fannie and Ginnie MBS issues on Schwab looking for that illusive par value 6% coupon issue.

    Today we now see a FNMA MBS issue offered very close to par ( or maybe a bit below) with 6% coupon the settlement is 9/14/2023. These are the Septembers of 2044. Cusip 01F060691. These are $25K principle notes.

    I will be looking to pick up 2 of these to add to my 5.5% coupon FNMA MBS below par next week.

    FWIW I think that MBS generally is one of the better value plays in the fixed income market right now. MLP common and term preferred stock in CLO equity funds are the others.

  2. Baby bonds with very long maturity dates I.e. (MGR = 2059) to me are difficult to gauge the risk and return. Even though it’s rated investment grade who knows what the future brings going out that far for this Junior Subordinated Note?

    Interest rates, inflation and economic conditions change in time and to go out 20-30 years is a “ who knows what” situation that I am no genie in a bottle to figure out. I will only go out 5 yeas on a baby bond as I want my $ back in a reasonable risky time period.

    1. PaydayInvestor – yes definitely is of a long duration and since no one can forecast interest rates even for next week–let alone for a 30 year (or more period) we are no doubt going to see wide swings. I do love the baby bonds of short duration–primarily the BDCs, but am well diversified so should keep the real damage to a minimum.

  3. GLADZ trading in the $24.70 range yielding over 8% for high quality BDC with 2x asset coverage and only 0.4% non accruals in its portfolio. Have been buying.

    1. Larry – 150%, not 200%..It was changed for BDCs in 2020.

      We agree that for the period of time during which the Notes are outstanding, we will not violate Section 18(a)(1)(A) as modified by Section 61(a)(2) of the 1940 Act or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act, but giving effect, in either case, to any exemptive relief granted to us by the SEC. Currently, these provisions generally prohibit us from incurring additional indebtedness, including through the issuance of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 150% after such borrowings.

      1. I’m not talking about the regulatory requirement I am talking about the actual asset coverage which for Gladstone Capital is about 2x and has held at this level for years. Yes, the requirement is only 150% but the management team here operates more conservatively at 200%, which combined with a nearly zero non accrual rate makes these bonds highly attractive in my view.

        1. ahah! Gotcha…. I misunderstood what you were getting across…. sorry ’bout that..

  4. Tim,

    According to my calculations, MGRB (at the 17.31 ask price) has a 7.18% yield to maturity (“YTM”) v MGR’s 7.06% YTM at the 21.35 ask price.
    I consider MGR, MGRB, and MGRD to be substantially the same (same company, and very similar maturities), so I’ve swapped between them.

    1. mbg–will check it out – doesn’t matter to me if it is the MGRB issue as you say they are essentially all the same .

  5. I just had an annuity company raise their rate to 6% guaranteed for 10 years yesterday.

  6. Tim, What is happening with Evergreen could happen here. I have mentioned before in the Bay area even with a multi year drought these past years the state has been demanding cities build more housing. The cheapest and fastest way is to build more apartment and condo complexes. Like any trend builders all do it at the same time. So a ton of projects are finishing up at the same time. They all have to go from short term construction loans to finding longer term funds. I do notice they are getting renters though. I wondered what might happen about this 6 months ago.

    1. China Evergrande is a totally different animal than we are used to seeing. It is a key player in the huge real estate bubble in China.

      Evergrande has more than $300B in debt. If it were a country, its debt would rank it near Portugal or Switzerland. It is going through debt restructuring processes (like chapter 11) in several countries already (Caymans and BVI that I know of the top of my head). I believe it is still the most indebted company in the world.

      It is also in a very different real estate environment.

      For example, it pre-sells most of its apartments (they are not for rent – they are purchased), and it has pre-sold over 1.6 million apartments that it hasn’t been able to (maybe can’t?) deliver. People are paying mortgages on many of those apartments already that aren’t even finished yet – and in many cases no longer have a believable completion date. There is a growing swell of people refusing to pay/protesting at their offices, etc. Sometimes looks like scenes from the US in the early 1930s.

      As you drive around many cities in China, you see a LOT of partially completed buildings with little or no work going on. In the US, this would have triggered a “bubble burst” a long time ago, but in China’s controlled economy, the government keeps things from crashing (strong arms banks to make loans/not to foreclose, gets healthy companies to prop up failing ones, etc. – anything to keep the wheels on).

      In many cases, Evergrande has stopped paying suppliers (many of whom are “required” to keep supplying) and isn’t paying many of its employees. It floated many billions of dollars in debt to individuals who are also not getting paid and are protesting too. quite a mess.

      Personally, I think the Chinese government will continue to prop up these big real estate companies (they don’t want a collapse of the real estate industry because of the recession that would follow), but I think they will do it in a way that the government ends up owning most of the assets and leaves most of the investors with very little. We have seen that before on a much smaller scale.

      I have been doing business in China for almost 30 years, but I wouldn’t invest a nickel in a Chinese company – but that is all just my opinion.

      1. Private, Evergrande is just the current real estate developer of the day in the news. there are a whole host of real estate development companies in just a s bad a shape (or worse!) waiting in the wings. The Chinese government is trying to keep control of the situation, but decades of intense investment in this sector and other sectors that led to ridiculous projects half finished or empty is coming home to roost. Combined this with the effects of the Covid shutdowns, falling population numbers, major unemployment of the population, competition from the other southeast Asian countries such as Vietnam, and huge debt levels the Chinese economy is staring at a huge contraction. Xi is trying to take the population off their coming problems with a rattling of the sabers. I agree with not investing in China and raise your bid to not one penny there! Do you follow Michael Pettis on the Chinese economy?

        1. I met Michael a couple of times years ago. I read some of his stuff maybe a decade ago (?). I should follow his writings.

          We do a lot of info gathering/sharing in China through contacts built up over decades. Its a good info exchange for them, and we use the info to provide briefings to clients.

          The Trump and Biden trade wars and the crazy response to Covid in China have taken a massive toll on the Chinese economy. Still seeing factories running way under capacity because of (in country) supply chain problems. Also seeing a lot of companies shifting to have their sourcing less dependent on China, so very little investment in China, lots in other countries in SE Asia and in Mexico.

          The Xi gov has been publishing made-up economic numbers for years to mask how bad things are getting. I pity the guy responsible for keeping all that fantasy data straight. It is really hard to keep it straight across so many outlets. We have seen a few cases where numbers get published in “smaller town” Chinese press that don’t jive with the official Beijing numbers. They are immediately withdrawn and re-released after being “aligned” to official numbers.

        2. Mr. Pettis has called 100 out of single digit ‘disasters’ in China. Sky is falling for sure in China.

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