Yesterday I was watching the business news at 5 a.m. and the 10 year treasury was trading around 5.02%—I said to myself ‘here we go–5% and heading higher’. Of course the next time I looked it was back under 5% and dropping. Finally ending the day at 4.83%–really a giant drop. The combination of Bill Gross and Bill Ackman yakking about a quickly softening economy and the continual war in the middle east makes for some demand in treasuries–will it last? We’ll have the GDP numbers on Thursday and the PCE data on Friday – we’ll see.
Yesterday we had a number of the smaller banks reporting earnings. Enterprise Financial (EFSC) and CNB Financial (CCNE) to mention a couple. The theme has been relatively similar — much higher costs of funds (I have noticed a couple banks with the cost of funds being up 10 times), moderately higher bad loans in commercial real estate and earnings that are flattish to down modest amounts compared to a year ago. As is noted by everyone these higher interest rates take some time to work through the system – and there is no doubt many commercial real estate loans yet to go bad – most commercial loans can go on with higher rates for a year or two before the debtor decides to walk away and some small banks will get hammered.
Insurance company WR Berkley (WRB) announced earnings yesterday–stellar–simply superb earnings in a tough environment–this company has to be one of the most well run insurance company’s out there. WRB has baby bonds with current yields in the 6.6% area–of course they have long dated maturities so ytm is not that great. I hold a small position in one of the baby bonds and would consider more with the thesis that it is a 1 year hold with the ability to cash out after 12 months with a 16-18% total return (6.6% yield and 10% or so on a capital gain as interest rates peak or move slightly lower).
Well equities are up 1/2% this morning and the 10 year treasury is trading around 4.86%—lets kick back and see what direction these move as the day wears on.