10 Year Treasury Getting Kind of Bucky

I note a number of people are talking on the site in various spots about interest rates–more specifically about the 10 year treasury pop.

Today the 10 year traded as high as about 1.97% before settling in the 1.93% area. The question is where are we going with these interest rates–sure seems like they want to challenge 2%–we’ll see.

I think what is best known by us that have been investing in preferreds for many years is that the high quality, low coupon issues are most likely to fall the most when rates rise. Certainly they haven’t gotten any love this week.

Some of the newer high quality, low coupon issues have backed off quite a bit this week. We had been used to these issues rising in spite of their dreadfully low coupons–not the case this week

The new PS Business Parks 4.875% (PSB-Z) perpetual which was sold on 10/24/2019 and traded as high as $25.10 has moved lower and now on the NYSE traded as low as $24.46 today before closing at $24.57.

The Northern Trust 4.70% perpetual (OTC Grey NTREL) held up better closing today at $25.10–and has traded only as high as $25.25–it remains on the OTC Grey market so we will see what happens when it moves to the NASDAQ.

The new Allstate 4.75% perpetual (OTC Grey ASTLZ) which only began trading 5 days ago has not reached $25 yet–closing today at $24.77.

The Public Storage (PSA) 4.875% issue sold in September was at $26.50 20 days ago–now it is at $25.60–whoops it got a bit ahead of itself.

Of course there are other examples–and I personally experienced small losses this week–very small–but losses just the same. I don’t hold the sub 5% issues, but holdings some CEF preferreds I am susceptible to some give back.

I would be surprised to see rates rise too much more–but only 6 weeks ago we were in the 1.5% area–and I wouldn’t have expected a 40 basis point rise then either.

24 thoughts on “10 Year Treasury Getting Kind of Bucky”

  1. Moody’s report is still kinda bullish on treasury bonds. And their analyst says 10 year bonds should not exceed 2% range.

    1. Also the coming Inflation will be inevitable because of the cutting rates. Stimulating bank sector with reverse repo in the treasury. And the tariffs will bring all the cash back into the system.

    1. Libor is rigged so there’s a lag between changes in market based rates and fixed rates like Libor. It’s sort of like how when oil prices fall, there’s a lag until prices at the pump fall. With the replacement of Libor with Sofr, this will hopefully change.

  2. Tim – Can’t help but wonder where the term “bucky” comes from… is it a midwest thing? I get the jist but have never heard the term… I need to know so I can get jiggy with it….

  3. I have computed the share price of these low yield IG issues for a buy position. Take the PSB-Z 4.875 issue, if it goes to 24 the yield is 5.08 at 23.43 the yield is 5.20 and i would initiate a small position there.

    A child of five would understand this. Send someone to fetch a child of five. Groucho Marx

    1. I think PSB-Z at $24.57 is a screaming bargain. No way should is PSA-I (both yielding 4.875%) be over a $1 more. I own a couple PSA preferred issues, but not PSA-I. It was way overpriced when it was above $26. I wouldn’t consider it over $25.15

  4. Hey guys, looking at the chart of 10 year, $tnx, I see resistance at 2-2.10. Above there and gets interesting and not good for our preferreds. Grid, I own OSBCP, why do you think they don’t call it. Is it tier 1 capital or the local boys won’t let them call because they all own it? Thanks ATB.

    1. Tim, getting guidance from management on redemptions is amazingly random. Some like the Landys who control UMH and MNR will tell you a year out their intentions to redeem a preferred. Others will act like they dont even know they have preferreds when asked and then they get redeemed a week later.
      At conference call two weeks ago management was asked directly. CEO said they were looking at it. When pinned down he expressed the order of preference… 1) Another bank acquisition 2) Redeem the trust preferred 3) Stock buy back….In that order. I posted this 5 days after it was said on Silicone Income and next thing you know a selling stampede occurred. So of course I loaded up in the 10.20s.
      One can read what they want into it. But to me a CEO isnt going to make 3 random calls in 5 minutes looking to buy a bank and then throw up his hands and say “I give up redeem the preferred”. So at my price point I liked reentering the issue risk/reward wise. I have owned it frequently through the recent years. Also, the previous now retired CEO said over three years ago they were “looking at it” in terms of redeeming it. And yet its still here.
      By the book after tax its like a 5.5% QDI, so its still reasonable Tier 1 cost (being grandfathered). But at some point due to its maturity date it will at some point even if not redeemed now become eventually “expensive short term debt”.

      1. Thanks Grid for your expressing your thoughts. Makes as much sense as anything. We shall see. ATB.

  5. Not-so-low coupon preferreds also dipped but not as much. All of my REIT prefs are down somewhat and I’m wondering if it means anything. Probably just a normal correction after overheating.

  6. A perpetual with a low coupon will always get hammered more due to a higher duration. Price drop = rate increase x duration x -1. A 30 year Treasury has about a 22 duration so a 0.40% change in yield should approximately cause a 0.40% x 22 x -1 = -8.80% drop in price. Times a $25 face value = $22.80. Just an approximation.

    If rates head up, some could get trapped.

    1. Marc, there are a few old 1950s preferreds still trading that have NEVER made it back to “par” since roughly issued. Forever can be, well, forever, ha.

  7. Tim, do you think the high quality, low coupon issues will continue to dig new lows?

    1. Eugene, The markets dont trade in theory. But in theory any 4.7% $25 issue that went to market one month ago should be trading about $23.50 right now. But they havent. People are still piling into yield, either unknowing, or a belief that this uptrend is a blip and will not last (which could be correct, who knows). But to reiterate, markets do what they do and theory is irrelevant. Some though have retreated hard from a recent spike though. SR-A was pushing near $28.50 a couple months ago and is now around $26.40 as an example.

      1. Gridbird,added a little SR-A today been waiting for it to come down it`s my largest preferred position.

        1. Big Lou, If it would somehow drop another buck it will be my biggest issue too. Just got back in today waiting for a meaningful drop as it got overheated.
          I dont know what I would sell but it would be something.

      2. Gridbird, thank you for your opinion. I agree with you that there is no any relevan logic and the new low coupon issues traded ridicilusly high with huge volume. Based on this trend curently I am a holder of two of those instruments and I am a little worry what will happen tomorrow.

      3. Does anyone here follow what the passive funds are doing? Many preferred and especially notes were bumped higher by one big passive fund which was undergoing a transition in methodologies. The final re-balance of said fund was 31st Oct and since then there has not been any significant buyer to keep these elevated levels. That;s why many are correcting in such a short period of time

    2. Eugene–I agree with Grid–we have mathematical formula for these things–BUT they are NOT worth much. We have always noted the interest rate moves that happen really quick hurt much more–while if they would happen 3 basis points a week for 26 weeks the slow march up would be less painful.

      Marc above lists a formula that would give one an approximation–in a perfect world–and it at leasts gives one a flavor.

      My best guess based on gut instinct is they will stabilize in here and if rates trade sideways the low coupon issues will start heading higher–slowly.

      1. Being one with zero patience, bought large number of JPGGL and ASTLZ (Allstate) both paying way too much. However, the SWANS I sold also went down with the 10 Year Treasury rising. Quickly sold a new Vanguard CA MUNI bond fund, dropping with decline. CTL (Century Link), got a good quarter and bought some of the commons with decent pro forma yield. Following Lord Xot bought just 300 shares of TOO-B and TOO-E altogether. I sold Sparke Energy after their bad 2nd quarter with declining customers and margin. Bought back 400 shares yesterday seeing an improved 3rd quarter in improved margin and EPS with decreased revenue. Sold some of oversized allocation of RLJ-A and quite a few WFC-L (good if held for 30 years or longer). Picked up some EVA (MLP with woodchips, no oil). I have held onto EVA for a long term, even after Rida says SELL. It issues K-1 but cleverly used expenses (deemed necessary by the general partner) to offset “guaranteed income” (fully taxable same rate as ordinary income. Be sure not to exceed $1000 limit if held in IRA account (per IRA account). General partner gets the customers from a sponsor with steady customers, pro forma yield around 7.5%. Upcoming dividend 11/14. I have been watching PSB-Z. I have no patience and decided to take on a little risk with higher dividend payor. KRG (eREIT) and AWP and perhaps SBRA healthcare REIT seem to hold with decent yield. All would be subject to market downturn of course. PEGI (Pattern Energy, Wind renewable) has been sold to a Canadian pension. Quite a few shareholders are still speculating that there may be other higher bidder. Good to hold till 2020 delaying cap gain perhaps. Juicy dividends all QDI.

        1. Hi John, all YieldCos and “most” 1099-issuing MLPs that I’ve held always paid a distribution – ROC. I’ve held PEGI since 2014, I have yet to pay any tax on its distribution; it is treated as ROC. Ditto for NEP. I have also held a few 1099-issuing MLPs throughout many years (at least over a decade) and only one in recent years has paid a partial QDI dividend and the compliment as a ROC (and, hence, why I stated “most” rather than all).
          Broker tends to initially report PEGI as QDI in 1099 but thereafter each year they issue a corrected 1099 that conveys a non-qualified distribution (ROC).
          Thanks for your posts and BR,
          No. 12 (<- he actually went to Cal)

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