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10 Year Treasury Creeping Closer to 2% as We Approach CPI Day

Well the 10 year treasury closed at 1.954% today after trading as high as 1.97%–right at the cusp of 2%.

On Thursday we have the latest consumer price index (CPI) being released and like everyone I expect the year over year number to be 7.x%. Honestly I don’t care too much about the year over year number–I care about the month over month inflation. The month over month number is forecast at .4% so it seems to me that a .4% or even better a .3% would be met with a rousing rally in equities which hopefully would stop the 10 year from popping over the 2% level. Obvious a .5% would send rates higher—I know they are going higher but ‘speed kills’ and I want rates moving at a snails pace.

As I watch rates go higher it is really interesting to watch ‘perpetual’ preferreds react–in particular the high quality issues. I love quality issues but when I look at the coupons and current yields I still find them over valued.

Looking over losers today I noted that the super high quality Gabelli Dividend and Income Fund 4.25% Perpetual (GDV-K) fell by around 3% today to close at $22.70–unfortunately that brings the current yield to just 4.71% which is still not attractive in a rising interest rate environment.

For now I continue to wait for better pricing in ‘perpetuals’ while holdoing a potful of shorter dated baby bonds and term preferreds while holding plenty of ‘dry powder’.

38 thoughts on “10 Year Treasury Creeping Closer to 2% as We Approach CPI Day”

  1. So, how is everyone playing this? I am a bit late in paring holdings due to some health issues but I intend to go to mostly cash and wait to see what the rest of the year brings. I will hold the stuff like SMLNP and Ocean Spray which I can’t trade anyway, and roll some of those over to my Roth while they are down.

    Most of the preferreds are perpetual and there is not a lot to choose from that are term limited. Might be time to look at some short term bonds, and there are some structured notes paying 6-8% linked to various indexes which are interesting. I already have some bank stocks which have done well and will goose those with option plays.

    1. I am selling issues 6 1/2 percent and less which I have very few remaining. It is interesting on the timing of all of this interest rate rise, Looking at all of the new issues of preferreds and baby bonds over the last six months now are off by 15 to 20% from par value -thus saving the issuers a lot of money if they had issued the preferreds and baby bonds today. The other great timing element of this decline in January is that all the wealth advisors can publicize how successful they were for their clients with an ending date of December 31, 2021. Jerome Powell can talk down the bond market even more so that the public can sell off their hard earned shares at a substantial loss allowing banks and other traders to pick up issues right before Powell reverses course publicly. Looking at bank reports, the big banks make their profits by trading, volatility and fear and less from making loans to Main Street, etc. Bof A reported less than five percent of their net income was from consumer banking in a recent report. Look forward to any comments by others on the board on their thoughts. FTM

    2. I have largely been trading a lot in a few liquid issues and riding them down while selling on upticks. For example, I bought more of SR-A at $25.35. I should have stuck to the plan and sold some when it spiked back to $25.60 but I didnt. I have recently sold off most my illiquids and have some cash.
      I have a lot in term dated and adjustables and quite frankly they dont do much. NSS for example is one. Its one of my bigger holds and it stays around $25 most of time. And then I have a decent slug that just dont do anything because they are unbuyable anymore, such as WTREP which is one of my biggest holds.
      Its hard to know when to dive into perpetuals because inflation is so high and that is the unique variable that disrupts past patterns I have been able to use.
      But for me I keep trading what I can, and if something drops more than others I will head that way for a quick play. Staying above water but barely. But if I take out my only common EPD I bought a lot of a month or bit longer ago, I probably would be a bit under water. But I have some big divi payments coming sometime. One is CEQP- its paying soon, and that has been a great hold and quick trade issue for me.

      1. I have not done terribly, but not well either. Bought some structured notes today which pay 7.5% for next 3 yrs as long as market doesn’t tank more than 40%. It is a monthly payer. Put more in iBonds earlier in the year and have a trust and business account I will set up for them.

        I hold some bank stocks which have done well and I goose them by selling calls against them. But I was slow to move to cash and am still doing that in anticipation that the Fed hikes will have to be frequent and fairly substantial.

        Most of the term preferred and baby bonds are either not appetizing or I already hold too many of. Anyone have ideas there?

  2. Economic News Release
    CPI CPI Program Links
    Consumer Price Index Summary

    Transmission of material in this release is embargoed until
    8:30 a.m. (ET) February 10, 2022 USDL-22-0191

    Technical information: (202) 691-7000 • cpi_info@bls.govhttp://www.bls.gov/cpi
    Media Contact: (202) 691-5902 • PressOffice@bls.gov


    The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent
    in January on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics
    reported today. Over the last 12 months, the all items index increased 7.5
    percent before seasonal adjustment.

    Increases in the indexes for food, electricity, and shelter were the largest
    contributors to the seasonally adjusted all items increase. The food index rose
    0.9 percent in January following a 0.5-percent increase in December. The energy
    index also increased 0.9 percent over the month, with an increase in the
    electricity index being partially offset by declines in the gasoline index
    and the natural gas index.

    The index for all items less food and energy rose 0.6 percent in January, the
    same increase as in December. This was the seventh time in the last 10 months
    it has increased at least 0.5 percent. Along with the index for shelter, the
    indexes for household furnishings and operations, used cars and trucks, medical
    care, and apparel were among many indexes that increased over the month.

    The all items index rose 7.5 percent for the 12 months ending January, the
    largest 12-month increase since the period ending February 1982. The all items
    less food and energy index rose 6.0 percent, the largest 12-month change since
    the period ending August 1982. The energy index rose 27.0 percent over the last
    year, and the food index increased 7.0 percent.

    1. Camroc says this every night before he goes to bed….” You will have pry my 3% fixed component I-bonds from my cold dead hands”

      1. If I was getting 10% from the government… I would feel a whole lot better about paying taxes. 🙂

        1. Mr. C, the only better safer investment the government ever offered was the shipping free credit card use of buying Susan B Anthony coins back in the day.
          Buy 10k of Susan B’s dump them off at the bank, get your tax free 2% cash back, rinse and repeat….
          Anyways with this CPI print out, that means we are 2/3 through the next CPI cycle. The next 6 month Ibond rate will be knocking right on the door with this cycles 7.12%. It aint Camroc cash, but its still going to be solid and well worth the IBond yearly contribution.

          1. was just saying to myself how frustrating the environment is right now in that rising rates makes what we hold worth less and in general they pay less than CPI increases, but holding cash like I am is even worse, so the best thing I’ve done is max out on IBonds. sheesh.

  3. US can not afford high rates and they will stay negative for a long time if needed . Recession is coming sooner or later and BBB and similar will be above par again even if they are not going to be called IMO . PRE-J trading at $24 with 5% yield is as a recession proofed as any

    1. Nikolas – I tried posting this thought prior in conjunction with your other comment on KKRS but I think I screwed up – I don’t think it went through: With your medium term vision of prices on BBB rated type preferreds returning to par and above from today’s levels, there’s one thing to keep in mind – ratings downgrades, and normally lots of them, come with recessions… So, no way would I be foolish enough to attempt to discount your view or timing on what will happen to the economy some day, but just bear in mind that what’s BBB rated today may turn out to be below IG when recession hits..

      1. That’s a very good point on possible downgrades during or after recession of certain preferreds. I am very diversified , not more than 1% invested in 1 particular company , so definitely 40 or more in my portfolio . I am buying now BB and higher rated preferreds and baby bonds close to 5% yield and higher callable starting from 2025 and later , so most of them are well below par. I bet that they will have a tailwind of capital appreciation of 6-10% :approximately 1.5-2.5% per year ( could be much sooner ) in addition to a nice yield and stability Yes , some of those may not make it back ,but they have a much better chance than not rated ones. Some partial purchases made with hope to get even better prices MGRD, T-C , ATH-D ,BAMH, BIPH , FHN-F, HBANP, JPM-J,L,K , MET-F, MS-O ,NTRSO ,PRE-J, PFH , RF-E , OPP-B, WFC-A, Z

    2. Realistically nothing says the fed can’t keep hiking into a recession completely inverting the yield curve until all assets are cleared and repriced and growth starts again. (Burn the forest down to save the trees)

      Would fix:
      Housing affordability for a generation. (Everyone would toss house keys or leave them in the front door for the bank collectors)

      Decimate equity prices.

      Reduce government debt levels as all new debt would be 20yr+ duration.

      Create a generation of savers.

      Business that are not cash flow positive would be decimated and reorganized after defaulting on loans.

      Banks/repo/asset managers would be holding daily auctions for assets but due to the amount of assets up for sale it would create further deflation of asset prices to near zero.

      Onshore credit would lock up with fed realizing QE is ineffective and would need yield curve control (fixed set rates) decimating the treasury market.

      On shore jobs as the world economy would not be able to withstand global deflation. Presently we are exporting inflation and importing deflation (cheap goods).

      Even though the present economy is a debt addicted (low rates), risk taking compulsive gambler (systematic risk companies that can never fail) With stage 4 cancer (zombie companies and leveraged assets everywhere). To suddenly start clearing this looming pile of quadrillion dollar assets would be frankly insane. Best to inflate our burdens (debt) away and kick the can down the road by buying up toxic assets with QE programs.

      1. By keep unstoppably printing dollars / euros there is a risk that YUAN & Ruble will become world reserve currency and we will need a small backpack with money to buy some groceries

  4. Tim… For us,this a buying- fest…AA-BB rated below $ 22-23.. 8-10% at call date and 4-5 % return. Better then any new offerings..

  5. I’m looking at the silver lining to the fixed income cloud. 1. I use these for income so paper capital losses don’t affect the income stream. 2. Future buys will be at better rates. 3. At this rate my MRD for next year will be considerably lower. Stay positive, I tell myself.

  6. First want to appreciate the contributors to this wonderful site Tim hosts!
    Can IG perp preferreds be considered almost oversold at this point – drops too quickly in response to the firm news of sure future staggered rate increases? I sold WFC and BofA pfd L’s 7.25-7.5s this morning to save what remained of my gains – they’re still at 30-35% over par which can’t hold (?) and I hope to pick up down the road if can time it… comparisons to more normal times of 2019 are valid I think.
    And aren’t already oversold the PEB’s, and BPYPO, BPYPM, NLY’s?
    I am not a trader and I’ve tried to live by staying with 6.25, 6.5 and better ~

    1. Randall, Your WFC and BAC preferreds are more unique situations to where par is really meaningless. They will just follow perpetual yield curve. And if that alone drags them back to par, we got a major major preferred arse whippin’ that has barely scratched the surface.
      Nothing is knowable, its where you want to play defense or offense at. Heck Fed could raise 4-7 times and give up if 10 year doesnt budge much.
      Look at 2013 versus today. Fed in 2013 was at zero announced they were hiking. This shot the 10 year briefly above 3% before they even raised one time! Today we are at zero Fed announcing rate hikes, inflation at 40 year highs and nope the 10 year isnt anywhere near 3%.

      1. Gridbird, on Jan 11, 2022, I received an email from Fidelity on my WFC-L, Voluntary Corporate Action. Sell WFC-L at I assume market value in exchange for WFC common. It was true UNTIL today, WFC-L acted like a falling knife while WFC was climbing. At the price on that day, I would have LOST 35% of WFC-L. As I recall, WFC-L is not calllable until WFC market price gets to around $200 per share. One of Doug Le Du’s “teaching” in Taper market was “market valuation may be down (on IG or his 10 criteria SWAN [I was not a strict follower of his IG. Hence had lots of foreign shipper preferreds]), holders income stay the same.” When people complain, he would post “do you want to pay more or less to buy the position which now gets cheaper ….”. Of course, the duration risks PLUS no wonder knows EXACTLY WHEN the Feds or the Market for 10 Year Treasury will reverse its course. ” LOL

        1. >Sell WFC-L at I assume market value in exchange for WFC common.

          That would be a very bad assumption. Need to read terms very carefully before agreeing to voluntary notices.

          1. Yes…. John, this action from WFC is older than the hills. They trot that thing out all the time. I remember having to tell my Dad to ignore the “offer” 6-7 years ago.

    2. Randall—other than oddball trades, the BAC & WFC L’s only got down to $1200 and $1100 in March ’20. If they go to par, the rest of almost all preferred issues will be in deep s**t.

  7. I am looking at lower prices on IG and some M-Reit Preferreds and thinking how valuable they are going to be during next cyclical downturn and recession i anticipate in 2025-2026 or even earlier . Started to accumulate those 2025-2027 with coupons 4.75% or higher trading well well under par. You can get not only stable income on BB+ & higher grades income issues but a capital appreciation of $1-3 . Any of those trading at $6-7 YTC sound good to me. Something like KKRS BBB+ rated with call 4/2026 is trading with a 5% yield and $1.82 tailwind (about 0.5% extra per year) or possibly higher if it trades over par

    1. Nikolas, I’m tempted by those 6%+ YTC issues, too. But that YTC value obviously relies on the issue actually being called. In a rising rate environment, will sub-5% issues be called in 2024?

      1. Really believe those are never getting called. They were issued in a huge negative yield rate environment that we’re unlikely to see again to that extent. Hence, it’s better to view those on current yield basis only. True perpetual.

    2. Nikolas:

      “and thinking how valuable they are going to be during next cyclical downturn and recession i anticipate in 2025-2026 or even earlier”.

      I would say that next downturn will arrive much sooner than that. The U.S. economy is woefully under-prepared for higher interest rates. Look at the U.S. household debt numbers that were released yesterday. My goodness. Just wait until some of these massive asset bubbles start to pop. Zero/negative interest rates worldwide were the foundation for all of it.

      “Total U.S. household debt rose by 2.2% to $15.58T in Q4, with total overall debt for the year marking its largest increase, on a nominal basis, since before the 2008 financial crisis, the Federal Reserve Bank of New York said in a report.”

      “For 2021, households’ total debt balance increased $1T and is $1.4T higher than at the end of 2019.”

  8. Tim, what is your strike point in terms of buying IG perpetuals? Many here long for the IG 6% QDI perpetual (or at least I do). I checked the math and it presently looks depressingly far away. I used BBB-, 6% JPM-C as the “marker” for comparison. When it was issued Jan. 2019, the 10 year was 2.7% and BBB credit spread was 1.9%…. Ugh….

    1. One could argue that JPM-C (and others) were a gift at the time based on how quickly it went up even before covid. Multiple times over 28 per share before covid. Seems to me when people are willing to pay 28 for a preferred 6-7 months after it was issued that things are kind of mispriced in a way for that particular timing.

      It is hard to recall the feeling in 2019 but right before it was issued didn’t we all think rates were going to slowly go up? And that is why it was priced that way? Now new lessons have been learned by the IG banks and they know people would fight over 5.25% let alone 6%. Yea. I agree. It does seem very far off. The spread would almost have to spike to get even close. That JPM-C just happened to be issued at the right time for buyers. 3 months later it had all changed.

    2. Gridbird, Tim and others on the site: What are your thoughts on KTBA Seven percent Bell South Corts currently selling at $25.25. No call until 2095. Underlying securities at time of issuance in 1999 were AAA securities. I have read the prospectus but this issue appears to be somewhat unique compared to other preferred issues. Dividends are paid twice a year with the next ex dividend date of May 27, 2021. Not a qualified dividend. The price on this issue has declined from over $28.00 to its present $25.25 making this an issue I am considering buying. Any insight if this security would be ok to hold in retirement accounts? It appears that there are no UBIT issues. Much appreciate your thoughts and insight as always. FTM

      1. FTmoney, you can’t buy KTBA. It is affected by the famous rule to make it a safe and great trading experience for all of us novice investors. SEC Rule 15c2-11

      2. Follow, your biggest problem is what Mr. C stated below. If on the rare chance you can buy somehow, here is some background color.
        To put it in simpliest terms you are buying 7% uncallable ATT subordinated debt. Its actually a true bond that trades on the bond desk. Its actually over 30% above par, so there is relative value in KTBA. KTBA just holds the 2095 bonds in trusts and divis out the interest payment to you after ATT gives it to the trust. This is why it pays twice a year. When you buy shares of KTBA you are actually buying certificates that lay claim to the debt held in trust.
        Long story short it is just a manufactured “baby bond” created by a brokerage back in the day when baby bonds didnt exist.

        1. Gridbird. and Mr. Conservative: You are both scholars and gentlemen.
          Thank you for your insight and wisdom. FTM.

      3. A mention of KTBA sent me down memory lane. So, I went back and looked at my brokerage record.

        I first bought KTBA in June, 2011 at 25.75; that lot was sold in February, 2016 at 31.00. Bought back in December 2016 at 28.75; that lot was sold in September, 2017 at 31.20. Finally bought at 28.50 in January,2018; final sale was 28.00 on April, 2020.

        I bought a ton of CORTS back in the day. I’m amazed any are still around; they were generally a good deal.

        I didn’t know they were now off-limits, but you can’t buy KTBA now, at least at Vanguard. I put in a limit order to confirm that. That’s a shame. I forgot all about them, but they would be worth another shot, given the AT&T story.

        You could, of course, just buy a 2095 or 2097 AT&T bond, but when I looked at them the bid-ask spread was wide and the yield at ask was under 5%.

        If you are curious, I suppose you could call your broker and give them hell about not being able to buy KTBA, and see if you can wheedle out at least a true asking price for it. Somebody has to be able to buy it. I suspect 25.25 is not a true price, given where the bonds are trading.

        1. The ones that are still outstanding are the ones that didnt have call warrants assigned or that the brokerage didnt put the self dealing call feature in. I doubt for most brokerage accounts trying to strong arm anything wont help since most established brokerage guidelines to not buy, only liquidate.
          They sent out warnings for several months prior to it being put into effect.

    3. Yup

      NI-B (Love it)
      Thanks to your post in the alert section at the time

      Good point about the JPM-C 6%

      I recall missing that around par because I was loading up on IPLDP during the 2018 crash
      Now IPLDP is gone – my allocation of capital was a total pooch screw.

    4. I am holding tight on my unsold low coupon IG and near issues, e.g. SF-D, 800 shares, VNO-O, my worst mistake [higher coupon fell below par, apparently investors hate huge eREIT in NYC I assume]. Sold my JPM-D and MS something QUICKLY and took small loss EARLY on. Holding tight on EFSCP and bought tight amount the other day only to see selling pressure mounting. Ex Div coming up this month. GRBK-A which I “regretted” failed to chase and foolishly envied those who bought this Egon Jones A rated, fell below par and currently near par with 5.7% coupon. Now we know Egan Jones is Knoll credit rating or Moody/SP/Fitch. Apparently animal spirits do not work in Taper for debt positions. I will not buy more commons. Just bought some GSK, which rejected a buyout offer. Today, the stock fell due to FLAT quarterly report. LOL. My biggest common winner is EVA, a renewable or kind of fake renewable [some say burning burn chips in high temp oven is not good for the environment]. They have negative earnings except decreasing EBITDA income. They issued more stock at discount $70. The company changed from partnership to C Corp. They intentionally reduced profit margin to expand their sales. Target consumers: Germany and Japan and some US. I sold some and bought GSK, silly me! SBUX my other large common stock (another loser) recovering though. EWBC and COST are the two largest winners. I will not sell and use dividend reinvest. BTW, most shippers are doing well. Not sure how they react if Biden accepts opponent party to wage war against China. GLOG and GLOP had a bad quarter, lower revenue and earnings, CEO Founder retired. Market showed some weakness, then it recovered. I held on tight because GLOP-A stayed, while the newer GLOP B and C momentarily trading below below par. They have all returned to above par. My recent BIGGEST mistake is ALIN-E with tiny amount of B. If not news by this year end, may sell for sales loss. Took some before the new year. I thank Tim and you for all the INFO. I hold on tight on my oversized SLMNP as well as LBDRP. By chance I came across VIACP from VIAC. For whatever reason, both will climb along with the market. No recommendation with possibly negative from Fidelity.com and Schwab. Yield is blow 6%. I stay away too. Nothing earthquaking to buy. I am fully invested and best to hold and use the income. All my best to you and Tim.

  9. It’s not clear to me that the equity and fixed income markets are necessarily headed in the same direction right now. I could see the stock markets rallying while the yields go higher in fixed income. A lower than expected CPI would certainly rally stocks, but I’m not sure it would rally the 10-year note. Is it better to have the 10-year jump much higher and then stabilize or have it slowly grind upwards. Obviously you think it’s better to go up slowly. Maybe there will be more and quicker bargains with a quick jump. I don’t have a strong opinion either way. I do have plenty of cash and will slowly buy targeted stocks/baby bonds along the way down and not attempt to pick the bottom and wade in heavily.

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