10 Year Treasury Moves into the 2.50’s%

As we expected interest rates are pulling back a bit–I think based upon the expectation of a neutral press conference with FED Chair Jay Powell this afternoon, as well as the pull back the last 2 days in the equity markets.

While generally this little movement (10 year treasury at 2.59%) is not really meaningful it does keep preferred stocks and baby bonds in the mode to gain a few cents here and there.

Also with the drift lower in interest rates we see redemption of preferred stocks by the quality companies–and if we get a sharp drop off in rates we likely would see a rush in redemptions and it always hurts when your favorite income producer gets called away.

31 thoughts on “10 Year Treasury Moves into the 2.50’s%”

  1. An important read:
    The One Question Successful Investors Always Ask Themselves

    Imagine taking a six-hour flight from New York to Los Angeles, but right before taking off you learn the airline has a new policy: Reclining your seat is negotiable.

    This poses two questions: First, how much are you (the recliner) willing to pay the person behind you (the reclinee) in order to push your seat back four inches? Second, what does your legroom cost the reclinee?

    Researchers ran an experiment and found that recliners were only willing to pay about $12 to recline, while reclinees weren’t willing to sell their legroom for less than $39.

    The difference can be explained by what behavioral economists call the “endowment effect,” where a person places more value on what they have than on what they don’t have. So if you were the reclinee, your legroom is $27 more valuable than your neighbors, simply because it belongs to you.

    In his book, “Stumbling on Happiness,” the psychologist and author Daniel Gilbert explains how the endowment effect is woven throughout our lives. “Consumers evaluate kitchen appliances more positively after they buy them, job seekers evaluate jobs more positively after they accept them, and high school students evaluate colleges more positively after they get into them,” he writes.

    In other words, a toaster, a job and a university are all shiny and lovely. But once they become ours, they instantly become shinier and lovelier.

    You’re probably thinking that placing more value on the things we already have is harmless behavior, but it cuts both ways. For example, it doesn’t help when you hold onto a losing investment.

    This happens all the time. Investors think about what price they paid for a stock or where it was six months ago, and then try to figure out their chances of getting back to even. In reality, investments don’t care what price you paid.

    And the other factor working against investors is an aversion to loss. It’s been shown we feel losses about two to two-and-a-half times more than we feel gains. To say that another way, we like gains, but hate losses.

    (This phenomenon has been used to explain why golfers do significantly better when putting to save par than when putting to make birdie. In short, golfers like birdies, but hate bogies.)

    So investors have these two powerful forces working against them: they fall in love with the investments they own, because they own them, and they hate taking losses. This is what keeps investors hanging on to terrible investments for years, losing out on potential gains.

    To avoid this trap, here’s the one question successful investors always ask themselves about each investment they own: “If I didn’t own this stock or bond today, would I still buy it now?”

    If the answer is no, sell. And if the answer is yes, don’t sell. It’s as simple as that.

    Warren Buffett echoed this very idea when he wrote in his 1996 annual letter to shareholders, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”

    In his 1998 annual letter he wrote: “[…] we made major purchases of Federal Home Loan Mortgage Pfd. (‘Freddie Mac’) and Coca Cola. We expect to hold these securities for a long time. In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”

    Yet, in 2000, he sold his Freddie Mac shares. “We try, therefore, to keep our estimates conservative and to focus on industries where business surprises are unlikely to wreak havoc on owners,” Buffett wrote in his annual letter that year. “Even so, we make many mistakes: I’m the fellow, remember, who thought he understood the future economics of trading stamps, textiles, shoes and second-tier department stores.”

    When you sell, you should be refining how you invest and improving your ability to make better decisions. As a result, your portfolio should improve.

    It’s so easy for investors to get paralyzed when selling, especially when looking at a loss, but all that really matters is that your money is invested as best as it possibly can — and that means constantly assessing your investments. Like billionaire Sam Zell once said, “Anytime you don’t sell, you buy.”

    Research shows it’s not natural for us to think this way. We have a tendency to focus on what we’re losing instead of what we’re gaining. It’s why we stay in losing investments and toxic jobs and bad relationships. We think, “I’ll do it differently next time.” The thing is, there is no next time. You don’t get a chance to do it over.

    1. Nomadicmist’s post includes this: ‘To avoid this trap, here’s the one question successful investors always ask themselves about each investment they own: “If I didn’t own this stock or bond today, would I still buy it now?”’

      I think this ignores the capital gains which may have occurred since buying a position at a good entry price (value investing). For example, I own an mREIT, Ladder Capital (LADR) which is up 74% since I acquired it. My YOC is over 11%, but the current yield is ~8%. I would not buy it at today’s price, but am happy to own it and plan to keep it.

      I also own a couple of stinkers: Kimco Realty (KIM) and AT&T (T). These are both down from where I bought and are struggling with perennially undervalued prices. Am I deluding myself by holding on to them for their solid dividend payments of ~6%? Value trap?

    2. Nomadicmist wrote “If I didn’t own this stock or bond today, would I still buy it now?” That simple statement has clarified my thoughts on sell decisions I’m contemplating.
      A speculative stock I bought has dropped in value and I was considering selling it before it dropped more. At the same time I wished I had bought it at the current price rather then the price I paid. My loss is past history and there is nothing I can do about it. I like the present price and would buy at that price so I might as well keep it. I could sell hoping it would drop more but it’s a volatile stock, I like the companies potential and I don’t have a crystal ball.
      Another example is a stock that pays a 3% dividend and the stock price has risen since I bought it. Since I bought it at a much lower price, my Yield On Cost (YOC) is 5%. That sounds good and I would keep it if I was truly getting that but I’m not. If I sold the stock and then bought it back 5 minutes later what would my dividend percent be on my purchase? 3% not 5%. Would I buy the stock today for the 3% dividend. No. I might as well sell, take my profit and look for something I like better.
      Thanks Nomadicmsit for your advice. It gets rid of some of the emotion and leaves the decision more to fundamentals.

      1. danzeb, knowledge is power and you definitely are on the right track. Thank you for your excellent examples and understanding. I’m sure we can all benefit from your post and good perception.
        Hope you are having an awesome weekend, Nomad

      2. Danzeb – I have a theoretical question for you – Suppose you identify a new stock (Stock B) that you consider to be identical in quality and economic aspects as your stock (Stock A) that now yields 3% only Stock B yields 4%. If you had to raise money to buy Stock B, would you consider selling Stock A to buy Stock B or would you think that was a bad idea because Stock A is yield you 5% on your original cost?

        1. YOC is still the same as long as you didnt buy any additional stock or drip’d the dividends back into purchasing additional shares and then your YOC changes. If no new purchases other than the orginal purchase, the YOC is the same, which is div/amount originally paid. I am assuming the extra 2% is really unrealized gain on the change in the stock price.

          The question then becomes, do you sell and capture the extra unrealized appreciated price since the purchase and then buy the higher yielding investment?

          My response would be, to try and figure out how to keep the original and buy the new. Why? If you make wise purchase decisions, and the 2 investments are equal, then that means you have 2 great investments, and why not own both for diversification? Or sell a little of the first and help buy the 2nd.

        2. 2whiteroses asked ” If you had to raise money to buy Stock B, would you consider selling Stock A to buy Stock B or would you think that was a bad idea because Stock A is yield you 5% on your original cost?”
          Yes I would sell stock A. At the time of a sell and buy what matters is the current value of the stock being sold and not what it was sometime in the past. The current value has a current dividend percent associated with it. YOC is a feel good thing but I would not use it to determine a present investment.

          1. Danzeb – I’m sure I’m guilty of keeping the “feel good” message of YOC in the back of my mind as well, but so glad that you used that term. The more I thought about it, the more I keep thinking I’ve never seen anybody bring up the term “YOC” when it’s gone against them over the long term…

  2. Had a meeting with PGIM portfolio manager for TR fund and their best fair value guess for 10 year Treasury is 2.50% so probably not much more to go unless a short term economic event intervenes. 2019 return is “coupon plus” with the “plus” already being earned YTD. Also, returns attributable to spread compression have run their course and will look to rotating to less volatile asset types as US/global economies inch towards slowdown/recession later 2019 or 2020.

    1. Alpha, I also think its a good time for people who have ventured into reset preferreds or floaters and knowing the mechanism that triggers the yield adjustments also. The depth and duration of the yield plummet would also need to be factored in.
      These could have counter intuitive price movements. Higher fixed yield perpetuals could rise in price, while adjustables (depending on the reset yields) could actually drop in price. Take for example two TransCanada issues (think Keystone Pipeline here).
      The Series 15 is trading slighly above $25 par with an approximate 4.9% yield. The Series 5 is trading at $12.84 with a approximate 4.4%. One is hugging par and the other is down over 27% in past 12 months. They are same priority but yet one is down a bunch and yet still yields less. This has to do with the adjustable kicker and the 5 year Tbill yield.
      The Series 5 has a lowly 1.54% kicker while the 15 has a much higher kicker of 3.85% and a minimum floor yield of 4.9%. The market is now assigning a premium to minimum floor yields. The Series 5 could be hung out to dry if Tbill goes to zero. Then its yield would drop to around 3%. While the 15 would maintain the 4.9% par floor.
      But on other hand if when reset times come for both say they are 2% 5 yr. The Series 5 at this price would jump to a 7% yield from purchase price and snag a probable cap gain. However a 2% would only get the Series 15 to a 5.85% yield.
      So there is a lot of thought planning needing to go into these if one decides to play. This is why I for example split between EBBNF and EBGNF. EBBNF has a lower yield going forward, but it reset off a 1.71% 5 yr US, so there is a bit of cushion in it on reset compared to the latter that just reset off 2.52%.
      I sold part of my EBBNF when it went above 20.50 a few weeks ago, but bought them back this week, when the price moved back under $20.

      1. Good stuff Grid. Have been unloading the (well) over par/past call issues the last few weeks though have been holding the high quality near par/past call issues. MTB-C comes to mind. Who’d have believed the EBGEF reset off a 2.52% 5yr would be higher than today’s 5yr. Good grief. Looking at the 2023-2028 resets/maturities there’s a possible income down-escalator if index levels stay low (like EUR). For this reason have been holding the longer-term noncallables like KTBA. Regarding EBGEF, very much appreciate that it’s USD, and has a healthy 2.82% kicker over 5yr. but that TransCanada kicker is huge.

        1. I agree with you Alpha, any perpetual non callables that have a decent yield are an excellent ballast to dropping or even permanent lower rates. Yield is certainly not all the same. Its all in the mechanics of the individual issue and its effect on yield curve and future expections.

  3. We’ve all heard the expression “I’d rather be lucky than good”. Well… back in Oct 2018, practically on a whim, I bought some shares in IEF – iShares 7-10 Year Treasury Bond ETF. It’s not yielding much, about 2.3%, but as the 10-yr rate drops towards 2.5%, this ETF has gained more than 5% since. So if Nomad is right and our rates are actually high in comparison to the rest of the developed world, we may see more cap gains in this Treasury bond ETF.

    1. Artemisa–and who would have thought that would have happened–I didn’t believe we would see 2.59% again in our lifetime.

  4. Interestingly though as the yield curve spread tightens up to 10 years, the 10-30 year spread has actually spread out a bit.

  5. Tim, my belief is that our 10 year Treasury rates are actually “high” compared to the rest of the industrialized world:
    Major 10Y
    US 2.60
    UK 1.18
    Switzerland -0.31
    Spain 1.19
    Portugal 1.32
    New Zealand 2.08
    Netherlands 0.30
    Mexico 8.06
    Japan -0.04
    Italy 2.54
    India 7.52
    Greece 3.78
    Germany 0.10
    France 0.48
    Canada 1.72
    Brazil 8.79
    Australia 1.93

    1. Nomad–true and that will serve to keep our rates down a bit as these folks chase our yield–probably good for us as we have more than enough to sell them.

    2. The 5-year Treasury is inverted to the 13-week Treasury this morning. The 10 year/13 week spread is 0.1.

    3. Nomad, the ten year rate just dropped to 2.44%. Not a good sign for future growth.
      German 10-year rate is below zero now.

      1. MFZ, thank you for your post. For the uninitiated here, US Government debt instruments go up and down with more people buying or selling these bonds. Right now in most places around our world there is enormous buying of governmental bonds thus driving yields lower. Usually, this means that there is tension and volatility in the equity markets (or world events) and bonds provide a “safe” haven for those that need to be invested. Once the Fed said that they were reticent to raise rates this calendar year, instructional accounts and sovereign governments wanted to lock in “higher” US Government rates buy buying bonds; this has driven yields lower and I am certain rates have not stopped dropping.
        Wishing you profitable investing, Nomad

        1. Nomad, I just want to say that I love it when more experienced investors post basic information like this. I do not consider myself a sophisticated investor and I like these types of summaries. I find them to be extremely helpful.

          Thank you.

          1. Amy, I truly thank you for your kind words. We are all here to help each other and I am so fortunate to be able to be apart of this great forum Tim has created. Please know that I appreciate your research as well and look forward each day to reading everyone’s posts here.
            All the very best, Nomad

            1. I am a little surprised to see many of my holdings in the red, admittedly not by much; but on a day where the treasuries and bonds do well one would expect preferreds to do likewise – maybe nervous folks locking in profits?

              Added a couple hundred shares of NEE-N this morning.

              1. I just called Schwab and they are working on getting the MRBPP issue up and trading. They expect it to be available on Monday.

                BTW, Nomad, your “Important Read” post above hit my problem square in the eyes – I am terrible when it comes to selling things at a loss. I can think of several issues that I need to cut my losses and move on. Most of them I thankfully didn’t put much money into (tanker commons that I bought during a free trial of J. Mintzmyers service in 2015 – ouch) but I need to start ripping some Band-Aids off. Thanks for that post.

                1. Hi Amy, I believe it is one of the hardest investment “lessons” for most of us to learn; taking risk off a portfolio by selling at a loss and moving on. We never want to admit we made a mistake and keep the “hope” alive that the poor management team or the bad sector will turn it around and we will become profitable again. I have posted my 10 lessons here and I reference them almost every week when I’m in my investing or trading approach. There are many days I ask myself about how much time I spend doing research and wonder if the time could be better spent. I was lucky to retire in my 40’s and have a lot of free time as my business interests have managers or associates to run the concern without me (usually). I work out at the gym almost every day to clear my thoughts of market action and volunteer helping others that are less fortunate with the free time to “stay away” from immersing myself too long staring at my computer screens. I am so happy I found Tim and everyone her at III to vent like this! Smile 😎
                  Have an awesome weekend, Nomad

                  1. Nomad, your posts here have been a tremendous assistance in my education. Additionally, your perspective on life in general and willingness to help others is admirable indeed.

                    1. mikeo, I truly am touched by your post and thank you for your kindness. I am so happy that we are all on this investment and life journey together. I am here to help anyone I can, please feel free to reach out anytime and know I appreciate your friendship.
                      Wishing you happiness and profitable investing, Nomad

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