Well equity markets are a bit ‘goosy’ today–can’t decide and what they are believing–are interest rates going higher or are they going to drift back down. Almost unquestionably they are awaiting news on the producer price index (PPI) tomorrow and then the consumer price index (CPI) on Wednesday.
In the mean time I did a little buying and a little selling. I let go of a chunk of the super safe Tricontinental $2.50 perpetual preferred-$50 issue (TY- or TY-P or a number of other tickers depending on the quote source). The reason I choose to sell a bit of this sock drawer issue is because it can move kind of violently if we were to see interest rates move higher.
I chose to buy (add to) a couple of my CLO holdings. I added some of the Eagle Point Institutional Income Fund 8.125% term preferred (EIIA) at $25.05 and a few shares of the Carlyle Credit Income Fund 8.125% term preferred at $25.72 (CCIA).
Now I know some think I am getting a bit aggressive but I continue to research and research on the CLO baby bonds and term preferred issues and I am having trouble gathering any info that says they have the huge risk that they are perceived to have—nothing says they are extreme risk. Does that mean they won’t go down? Of course not – I think the biggest risk is they are not well understood and what investors don’t understand they sell off in times of uncertainty. I am closely watching the net investment income and the net asset values of the issues–both will give me substantial indications of where the asset class is going. Of course I monitor the asset coverage ratios closely.
I will be publishing my tweaks to the laundry list page of holdings before the day is out.
Fidelity is annoying with its restriction on how many TY- shares one can sell. It’s illiquid, understood, but Fidelity wouldn’t accept a 20 share sell order. At this rate, I can’t imagine how one could get out of a large position (I only have a few shares myself).
Really? That sounds awfully low vs the daily volume shown, low as it might be…. With you having mentioned this, as a test I figured out the number of shares Fido’d let me sell of the “expert market” listed SLMNP…. It’s 45 shares. By comparison, there has been a total of 10 shares traded in total volume on SLMNP in all of 2025. How do they come up with that number on SLMNP vs the number you’re saying for TY-? Could it be the algo’s relaxed for expert market issues? That would be contra to the spirit of the nanny protection they believe they need to provide for we dumb’ns
I think their algo relies on the current day’s volume. I tried the same order a couple of hours later and it accepted it this time. I checked the volume at the time and it was around 500 shares.
AJ’s account is true. I held 550 shares of a thinly traded preferred, and recently Fidelity would not allow any online sell order of 100, or 50, or 25 of my 550 shares because it “exceeded the limit” of some formula based on average volume over a period of time, possibly two months. Absolutely absurd. Thankfully, they gave a phone number in the blocking pop-up, and with a call they unblocked the entire 550 for a limited period of time to allow me to place an online sell order. A new, recent annoyance typical of Fidelity.
Unfortunately this has been going on for months now.
RF+F traded down to $24.95 today. It has a 6.95% coupon & good call protection.
Chuck-
RF-F is down 5% in 5 days. Any explanation?
Tim, based on your recent note re CEF preferred, I took a starter in Highland Income Fund HFRO-A currently yielding above 8%, cumulative, and A1 rated by Moodys with 624% coverage.
Understand the fund itself has a bunch of high yield stuff including some CRE, but seems like they are required to maintain coverage ratio.
Would love your thoughts on this one.
Dan–I have shied away from this one because their holdings are kind of incestous (related companies etc). The flip side is they have really built up their coverage ratio–around 700% as if 6/30/2024 so should be pretty safe. 1 thing to remember it is perpetual (versus baby bond or term preferred) so pricing will move around more than baby bonds or term preferreds which gravitate toward $25.
Thanks Tim, appreciate your response and the warning on this one. I’ll keep it for now but in the questionable bucket.
One thing I like to look at with these is the coverage based on the market value, not the book value, of the common. You get a much lower coverage, but still not bad, for HFRO-A. Also, HFRO recently announced that they will be issuing additional preferred stock in order to acquire the common. Not what you want to hear as a holder of HFRO-A.
CEF preferreds are generally safe but this one is a red flag because of the low price. If it’s a steady low price not cyclic volatility I always assume investors don’t want it for a reason.
Tim,
Thank you for posting your sales with losses on the Laundry list. No investment strategy is perfect and I have listened or read too many times about investors who share their profitable trades but never mention their losses.
Charles–not too many losers (when including dividends and interest), but I would rather take a minor loss that ride through larger losses.
Tim
Have you considered the Janus Henderson Aaa Clo ETF for purchase? I would be very interested on your opinion.
Bill F–yes I just reviewed it last night and I love the share price stability—and may dip into it a bit at some point in time. Right now I would like a little more yield–its around 6% now–which is great from simply a risk/reward prospectus. Did you know that there has never been a default on the AAA tranche of a CLO?
I own CLOA, ICLO, JAAA, JBBB, HSRT and a few others in various accounts. I’m trusting/hoping the ETF managers know what they’re doing.
This is JAAA, right? As it happens, I spent a few moments looking at it this morning. Tim, as far as I’m concerned, you nailed it: “the biggest risk is they are not well understood.” Though I hate to admit it, I get easily confused by the difference between CLOs and CDOs, though maybe if I spent more time looking into it, I’d see it is obvious. But re CDOs, I have some PTSD from the GFC…. (enough alphabet soup, yet?) If anyone has a source that they can recommend as best covering CLOs, I’d appreciate it.
WKFI–I am in the middle of this book –just got it last Friday. 200 pages and very good. 232 bicks from amazon. I had not spent as much time as is deserved on the topic so finally and doing so.
CLO Investing: With an Emphasis on CLO Equity & BB Notesby Shiloh Bates (Author)
Recommended by Greg Gilbert who comments on this website.
Thanks very much, Tim. I’m on it.
WKFI,
CLOs are a type of CDO focused on corporate loans. The problematic CDOs from the GFC involved subprime mortgages. All CDOs involve “tranches” where group 1 gets paid first and gets AAA rating, group 2 gets paid second and gets BBB, and so on. The problem with the GFC mortgage CDOs was less the concept of tranches and more the models used to decide how much cashflow was necessary to make a AAA tranche, how much for the BBB tranche, and so on. Illustratively, maybe they thought the first $60 could be AAA, but really it was $30. The reason for this miscalculation was a bad idea about the value of geographic diversification and a lack of foresight that liquidity could seize up and basically inhibit economic foreclosures in many markets.
CLOs also require modeling, but it’s focused more on business risk, and nobody thinks SMBs are as low a risk as people thought subprime mortgages were. CLOs do have a better track record going back to the 1980s.
If the idea of tranched debt securities makes your blood run cold, then sure, avoid CLOs. Personally I would be find if we got rid of most kinds of tranches and created more incentives for firms to issue investment grade bonds, loans that stay on banks’ books, or equity.
I do now.