Rates Pushing a Bit Higher

Interest rates have pushed up a little in the last 24 hours as the FED FOMC minutes show they are likely to push rates higher in the months ahead.  Rates creeping higher is fine with us–but lets skip the 20 basis point jumps in a few days—let’s do 1 basis point a day for a week.

With the strong JOLTS (job openings and labor turnover) on Tuesday we think that one vote for higher rates is in for a December rate increase.  From our perspective absent a black swan the December Fed Funds rate hike is going to happen.  Anything after that is totally data dependent.   

In spite of the non stop trashing of the Fed by the talking heads I don’t believe that any sane person will push rates to the point of causing a recession–we will have a recession, but it is not the fault of this Fed–the punch bowl has to be removed sooner or later and it should have been removed years ago (or alternately the balance sheet run-off should have started years ago).

We will be on the road most of the day so will miss any potential fun today–oh well there will be plenty more ahead.

Conifer Holdings Baby Bonds Trading

Our sleuth Eugene has noted that the Conifer Holdings (NASDAQ:CNFR) 6.75% baby bonds are now trading (or will be shortly).

We have checked eTrade and the symbol (NASDAQ:CNFRL) is active, but it is not showing trading–Fidelity it not showing it active yet.

CNFR is a small specialty insurance company which we could compare in size to Atlas Holdings, which also sold a baby bond this year.  Both have just around $100 million in revenue.  Atlas sells insurance into the specialty auto sector, while Conifer sells to ‘mom and pop’ in the ‘main street’ businesses.

At this time Conifer is incurring small losses in their businesses, but experience shows that they will be able to get to break even or better in the next year or so.  We have not done a deep dive on the companies financials at this time–just a quick skim.

Our interest is the 2023 maturity–but we would only be interested if it trade down a buck from $25 bringing our yield to 7%ish or more.

Further details and prospectus link are here.

 

LNG Shipper Dynagas Prices New Preferred Units

Dynagas LNG (NYSE:DLNG) has priced their new preferred units with an initial coupon of 8.75% which will be applied until 2023. After this point in time the coupon will float at a rate of 3 month Libor plus a spread of 5.593%.

The company is selling 2.2 million units plus another 330,000 available for overallotments.

The pricing term sheet can be found here.

The issue will trade on the OTC Grey market under the ticker DGAGF starting sometime today (Wednesday).  The permanent ticker will be DLNG-B when it moves to the big board.

All is Well in the World Today

So last week the ‘world was ending’ and today apparently it was a ‘just kidding’ moment.

To us there is still something wrong with these markets–the DJIA is up almost 500 points and the 10 year treasury yield is off a basis point.  This after a JOLTS (job openings  and labor turnover report) report that showed over 7 million job opening in the U.S. with just 6 million folks looking for work–normally this should scream wage inflation coming (or already here).

The one item that is normal today is that preferred shares and baby bonds are trading 10 cents higher (the average $25/share).  After taking a hit like the last few weeks almost all preferreds are basing and moving a bit higher–likely they will recoup a total of 50% of their losses and then quit moving higher–awaiting the next market moving event.

 

Dynagas LNG to Sell Fixed to Floating Preferred

Smaller MLP Dynagas LNG will be selling a new issue of fixed-to-floating rate preferred units.  The company is a shipping company which only owns LNG carriers (6 at the current time).

Of course details are not yet known, but the fixed rate will remain until 2023 (5 years).

Dynagas (NYSE:DNLG) currently has 1 other preferred issue outstanding that carries a coupon of 9%–the issue can be seen here.

The preliminary info on the new units can be seen here.

NOTE that DNLG issues a 1099 instead of a K-1 at tax time–one of the few partnerships which does this.

Thanks to Eugene for the quick heads up on this new issue.

 

CEF Priority Income Fund to Sell New Term Preferred

Closed end fund Priority Income Fund is selling a new term preferred.

A few details of the new issue have been released and the issue will have a mandatory redemption in 2023 and they will sell 1 million shares.

The company has another term preferred issue outstanding with a coupon of 6.375% which was sold in June–PRIAF-A which can be seen here.  The older issue has a maturity in 2025.  It looks to us like they probably shortened the maturity on the new issue to garner a lower coupon than would be available if they went longer out in maturities.

The preliminary  prospectus can be seen here for the new issue.

Monday Morning Kickoff

Stock market investors got a wild ride last week with the DJIA trading in a range of 24,900 to 26,540, but closing the week off the lows at 25,340   Interest rates traded in a range of 3.13 to 3.24% and closed the week at 3.14%.   We should see flattish interest rates for this coming week given what we believe will be a absence of data that moves rates much higher or much lower.

Last week we had both the Producer Price Index (PPI)  and the Consumer Price Index (CPI) released and neither would show much inflation with the PPI at  plus .2% and the CPI at plus .1% versus expectations of plus .2%.  Obviously we are not seeing a big bleed through of higher wages or tariffs, but we suspect these are coming in the next 60 days.  As we mentioned last week these numbers helped ease the rise in interest rates from the prior week.  The University of Michigan Consumer Sentiment number was released on Friday and it dropped off just a bit to a preliminary reading of 99 from 100.1 in September.  This is a critical number to us.  Watch the various consumer confidence numbers in the months ahead for a hint to further FED moves.  On Wednesday last week we had a 10 year treasury auction of $23 billion in notes and it had soft demand–the lowest ‘bid to cover’ since February and of course the interest rate was the highest at 3.223% since April, 2011.

For the coming week we have the Retail Sales and the Empire State Manufacturing index being released on Monday,  Industrial Production, Housing Market Index and the JOLTS (job opening and labor turnover) report on Tuesday.  Housing Starts on Wednesday and Leading Indicators on Thursday and lastly the Existing Home Sales on Friday.  Up until 2 weeks ago none of this data was held to be meaningful–maybe it is now time to start paying attention to the information.

The Fed Balance sheet rose by $2 billion last week after falling $18 billion the week before.   Maybe the FED was a tad spooked by the markets recently and held off on run-off—or maybe it was just the luck of the draw as every few weeks there is little to no run off.  Who knows for sure–and we will never know.

We had little new issue action last week with the exception of the singular issuance of baby bonds by OFS Capital (NASDAQ:OFS).  The issue came with a coupon of 6.50% and a maturity date in 2025.  The issue should trade sometime this week under the ticker of OFSSB.

The average price of a $25 preferred fell a bit last week to trade at $24.17 which is 8 cents lower than the previous week as interest rates stabilized.  We now have 244 issues trading under $25 which is 9 issues more than the week before.

NOTE–REIT DDR Corp is now Site Centers and the ticker has changed effective Friday to SITC.

A Pause that Refreshes?

While futures on the DJIA are up over 300 points this morning we would not be surprised to see them end the day negative–BUT we hope to see a pause in the drop giving everyone a chance to ‘regroup’ mentally.

While we are not affected much by equity averages we are at the time when the ‘spillover’ to the preferred stock arena could occur–toss the baby out with the bathwater.  We will be interested to see consumer sentiment and confident numbers next month when they are released–these are key factors for interest rate hikes (or not) ahead.

While we would relish the opportunity for picking up some bargains, we detest loss of capital–even if the loss is shorter term in nature.  I guess we want to ‘have it all’.  But this talk is all just loose talk since we are not changing our portfolio now.  We have cash available if bargains happen–but if not we just keep plowing ahead.

The 10 year treasury is at 3.16% this morning–so a nice pause in interest rates here would be nice for investors as well.  Obviously the forecast is for higher rates ahead but we hope they move slowly–a basis point or two per day (or week), but we all know now that data that wasn’t important last month all of a sudden is important.  We continue to believe that the term preferreds and short dated baby bonds are the best arena to play in.  As we move through the months ahead investors will be faced with making their best guess as to whether interest rates are peaking–once we determine that rates are at, or near, a peak we will be faced with decisions on whether to start moving some into the perpetual preferreds arena.

OFS Capital Prices Baby Bonds

BDC OFS Capital (NASDAQ:OFS) has priced their new issue of baby bonds with a coupon of 6.50%.

The issue has a maturity date of 10/31/2025 with an early redemption available starting on 10/31/2020.

The pricing term sheet can be found here.

The issue will not trade on the OTC Grey market since it is debt, but will trade on the permanent exchange (NASDAQ) under the ticker OFSSB within a week or so.

BDC OFS Capital Corp Announces New Baby Bonds

Smaller Business Development Company OFS Capital (NASDAQ:OFS) has announced a new issuance of baby bonds with a maturity date of 2025.

No details of the issue are known at this time–but will be known by tomorrow.

The preliminary prospectus can be read here.

OFS currently has one other baby bond outstanding (NASDAQ:OFSSL) which carries a coupon of 6.375% and is trading right at $25.00 and also has a maturity date in 2025.

Thanks to Eugene for the heads up on this issue.

Wild Ride to Continue Today

NOTE–the CPI has been announced today with a soft number of .1% increase versus an expected .2%.  This should be of some help to interest rates for today and tomorrow.

Again we will be out of the office 50% of the day today and will miss the excitement in the stock market-but we don’t care as thus far we have escaped much damage and with the 10 year treasury falling in yield since late yesterday we do not see us doing any buying right in here.

The 10 year treasury auction yesterday was “tepid” and for a short time after the auction the 10 year spiked up toward 3.25%–then cooler heads prevailed and it tumbled to close the day around 3.18%.

Even though we will be out of the office we have all of our watch list on the iPhone–and that list is all term preferreds and short maturity baby bonds.  It is highly likely too early to consider a major move into investment grade issues.  The current yields of the investment grade preferreds are 1/2% higher than a few weeks ago and most are yielding around 5.75%–we want 7%–or something around there from an investment grade perpetual.  We aren’t being greedy–but with a perpetual security there is plenty of interest rate risk and we want to be paid for the risk.

We actually do own a few investment grade preferreds (even though we know it is too early to buy them)–in spite of the knowledge of how they act when interest rates rise.  We will write further on them as soon as we have a chance, but they are maybe 1% of our holdings.  In the past we have written about buying something ‘experimentally’–and that is what we have done on a few hundred shares of various issues–1st hand knowledge on exactly how investment grade acts over the course of months and years.

Wow–Stocks are Hated. Income Issues Hang Tough

So we were looking for stability in the interest rate area yesterday and we got it as the 10 year treasury is unchanged today.  Of course with the DJIA average down 400 right now you would expect interest rates to drop a bit.

Yesterday we personally saw good recovery from the small losses we incurred last week–in fact we are about even and are more than happy about that.

This afternoon we have a fairly large 10 year treasury auction which will be interesting – we will see what the demand is for the paper.  We think this is one of the most important numbers for now.  The marketplace is acting like buyers will demand higher rates yet so we will see if this starts a new round of selling in income issues.  Normally after a larger spike in rates like we have seen in the last week or two we would see a few weeks of ‘backing and filling’ in rates–if rates were to now move higher by more than a few basis points we would be concerned that we could spark a ‘tantrum’.

We have to head out of the office for a few hours so we will miss the fun, but needless to say if you have been doing any selling today or yesterday it would be good to build a bit of dry powder–given the money market rates now being over 2% holding a little extra cash isn’t quite as painful as it has been in recent years.

 

 

Looking for Stability

Finally by midday Monday stocks began to recover from early losses to climb to a closing gain. The bond market was closed so we will need to await trading today to see if we can find stability in the interest rate arena. Our best guess is that rates will stabilize today sometime in the 3.23% area. By stabilizing we are talking about for the next couple of weeks–then there will be more news, more economic releases etc and we can proceed to move rates higher or lower–of course we hope at a slow pace of movement.

Yesterday was a decent day for many preferreds and baby bonds as many issues bounced by 1-2%. Also REITs bounced after falling 5-6% last week. Personally we picked up some Independence Realty Trust (NYSE:IRT) on Friday as it fell into the $9.70’s, but this was just a flip and we have sold the shares already as IRT closed at $10.10 Monday. We do note that while we had some bounce in many income issues others fell 1-3%. Those falling on Monday were mainly very thinly traded issues–they “trade by appointment” and if they don’t trade prices are not shown up or down.

We are watching as even the term preferreds and short maturity baby bonds have moved slightly lower. Issues like the new 6.375% Gladstone Investment (NASDAQ:GAINL) which has traded as high as $25.60 in the last month is now around $25.15.  The safety play–Kayne Anderson 3.50% term preferred (NYSE:KYN-F) has been trading between $25 and $25.10–a great place to “hide out” as it has a mandatory redemption in 15 months.

Some of the issues we love are the CEF preferreds—mostly very highly rated–but also mostly perpetual.  We can’t buy them–we love them–but we can’t buy a bunch of stuff that we know will be pounded lower as rates move higher.  These almost all have coupons of 5-6% and most are trading at or below $25–unfortunately the current yields remain under 6%.  So super safety still pays an inferior reward (for a perpetual security)–we will wait as we want more–say 7% and up.  We are happy to hide out with too much cash and term preferreds a bit longer.

IF we were perpetual preferred buyers we would be watching the fixed-to-floating issues. We would be most interested in the issues with a initial coupon over 8%.  This gives one a little cushion from rising rates as compared to fixed rate buyers.  Of course we personally are not buyers of perpetual preferreds yet–but the time will come–probably some time next year.

 

 

 

Monday Morning Kickoff

Well last week was definitely a wild one for both stock and bond markets–and we expect that we will begin to see some settling in the markets. Interest rates traded in a range of 3.05 to 3.25% and closed the week at 3.22%.  Our best guess is that rates will stabilize right in here and could drift a bit lower in the week ahead–that would be a typical  pattern.  This week will see the bond markets closed on Monday for the Columbus day holiday.  We would guess that the stock market will also settle down after the DJIA traded in a range of 26,300 to 26,950 last week before closing at 26,447.  Equity markets will be open all week–no holiday on Monday.

So looking back at last week the biggest economic news was the modest number of new jobs created in August.  134,000 new jobs were created which was way under the consensus expectations. The wage component of the report indicated wages rising at 2.8% annually which is slightly lower than the month before–no giant wage inflation coming through–so far.  Of course the few jobs being created was blamed on the weather in the southeast.  The PMI manufacturing index came in as expected,  while the ISM manufacturing index came in weaker than last month and weaker than consensus.  Construction spending was weaker than expected and than consensus, while motor vehicle sales were stronger than anticipated at 17.4 million vehicles annually.  The Purchasing Managers Index for services came in strong while the ISM non manufacturing index also came in stronger than expected.  It is always amazing that hardly any economic data has been deemed important–for months and month and then like magic–voila–someone thinks data is any stronger than last month.  Oh well we simply have to react–or not–to movements in interest rates.

For the coming week we have absolutely no economic releases on Monday and Tuesday.  Wednesday we have the PPI (producer price index) and the forecast is for a .2% increase with the CPI (consumer price index) being released on Thursday.  The CPI is expected to increase by .2% for September.  If expectations are met it may relieve some of the interest rates pressures.  Friday we have the Consumer Sentiment Index being released–we shall see how strong the numbers are as all consumer sentiment numbers (i.e. consumer confidence) have been running really hot and to us great numbers ‘green light’ the economy for months to come.  Short of a black swan event consumers don’t go from super bullish to bearish over the course of a month–these things take some time to play out.

The Fed Balance sheet fell by $18 billion last week after falling $16 billion the week before.  While these larger run offs may contribute some to increasing interest rates we think it only 1 of many potential factors.  One thing we know for sure—demand for treasuries is reduced as the balance sheet runoff continues.

We had a few new issues come to market last week.  Business development company THL Credit (NASDAQ:TRCD) announced a new baby bond that priced at 6.125%–the issue matures in 2023.  Midstream MLP DCP Midstream (NYSE:DCP) announced a fixed to floating rate preferred with an initial fixed rate of 7.95%.  This issue is trading under the OTC Grey Market ticker of DCPUU and last priced at $24.50/share.  Lastly Brunswick Corporation (NYSE:BC) issued a 6.5% baby bond with a longer maturity date out in 2048.  Because of the shorter dated maturity we may have future interest in the THL Credit issue–but not at $25–maybe at $24 or less.

The average price of a $25 preferred fell by a hefty 47 cents to trade at $24.25.  We haven’t seen this type of drop for quite some time, but we would bet a dollar that prices will stabilize and rise a bit in the week ahead.  We now have 235 issues trading under $25–the largest number we can remember seeing this year.

 

Fun Fact Friday

Our ‘fun fact’ today is – who was the very 1st visitor to this website?

The answer is Gridbird.

Back in December, 2017 (if I remember right)–long before we were near completion of the site I had an exchange with Grid on Seeking Alpha and noted the site.  Thus with the exception of folks working on building the website Grid became the first one to visit.