Another Rough Day

You would think the damage was done to preferreds and baby bonds yesterday–but the real damage is today with the average share price off 1/2%. Yesterday was flattish. The 10 year treasury yield has really popped today and is not backing of from the 3.65-3.69% area where it has been all day—slowww down!

This is why I just nibbled a bit today–likely more pain to come, although no one can predict the movement of interest rates on a day to day or week to week basis, but we need more data to see what the future might hold.

Mortgage rates have hit around 6.5% today–the highest level in 14 years. There is zilch happening in the refinancing marketplace–it has been partially replaced with home equity loans. Sales are slowing substantially and I expect in the midwest when winter hits this will grind to a halt.

The next CPI report will be released on October 13th at 7:30 am (central time) – 3 weeks from today.

The next employment report is October 7th–two weeks from tomorrow.

The next FOMC meeting is on November 1st/2nd–so 5 weeks from now.

Of course we will have lots of other data points as well, but these are some real key pieces of info we need to have weaken somewhat–if not we will see another 75 basis point hike in November—with some weakening I think it would be a 50 basis point hike.

17 thoughts on “Another Rough Day”

  1. Higher yield preferreds are pricing in higher bankruptcy risk. Their price drops are not based on rate hikes alone. Need to consider the domino effect on the economy.

    1. Absolutely Martin as rates rise risk rises. I have been watching the insurance issues take a shellacking – part of which is related to the relatively large mark to market losses they have been taking on the income statement. Same goes with BDCs which are taking the same losses.

  2. I show 184 preferreds made new lows today out of 569 that traded. Call it 33%.

    80 babys/terms out of 198 that traded which is 40%.

    Not surprised with the preferreds but I think what this says is there is not a lot of difference between a preferred which has become a perpetual and a very long dated baby/term that matures in ~50 years. Yes, there is some debt stack benefit, but darn near NO price benefit.

    1. Tex, so true. I’m buying more of those low coupon/high IG pfds as proxies for perpetuals and they were 3 of our 4 buys today at new lows – as they fill a slot in the stack and provide a bit of diversification.

      Looking over the horizon, a secondary tool is also leveraged in here…if we return to a declining interest rate environment in 18-24 months and redemptions started firing off again, they’d be last to be called and the TR would be exceptional from these 30% discounted levels.

  3. Some of us that live here in the states but own Canadian bonds or dividend paying stocks are getting a double clubbing. As of today it takes $1.3366 Canadian to buy one us dollar. This is the highest I have seen it in 20 years. Plus the price of the bond is dropping rapidly as inflation marches onward. Not a good time to hold any Canadian bonds.

    1. Twin, what goes down usually comes back up in the currency world. It just seems like the other day it was completely flip flopped. I hadnt been watching it with Canada recently. But you got me thinking there is a Canadian ute preferred I would love to exploit on the currency trade if it will drop just a bit more.

    2. Twin, If you liked ‘em at steak prices but can get more at hamburger prices might be time for a trip to the burger-joint for take-out.

      I’d forgotten to check out the CN issues in the last bit of time here – need to revisit. Always appreciated that CN issues frequently carry a superior risk/reward as long as the Form 1116 doesn’t cause issues.

    3. If you are holding the assets in Canada just best to leave the income there for now. Or alternatively, if the assets are in a US Brokerage account, buy additional Canadian equities in your brokerage account on the TSX and thus have no currency conversion…though of course a higher trading fee.
      Even with FX risk I feel safer with Canadian investments and Canada overall. Though the faster Trudeau is gone and Canadian consumers begin to deleverage the better I’ll feel.

  4. Having IG issues reaching for 7% is very cool. Wouldnt it be great to have this and more fear over the next 3 months continue… and will give me plenty of time to buy IG when they are $15-$18? If in the next 6 months fed doesnt increase rates… the desire is that I hold these forever. If I do happen to need cash (not sure what that would be) but the cap gain is looking enticing. I have 13 yrs until retirement and can the current environment continue for another 13 years? It is nice to see the fear and panic and is creating some really good buys for my personal investments. I cant imagine that over the next 13 years we have the same environment as today with inflation out of control. But.. who knows? I dont have a crystal ball, just father time.

    1. I remember in 1980 couldn’t imagine it ever happening again in the USA, but here we are. Funny story, young people are stunned by 6% mortgage rates, I remember when I refinanced my home in 1998 from 8.25% to 6.5% at the infamous Countrywide Home Loan branch, The loan officer told me how lucky I was because we will never see rates this low again in our lifetime. Bottom line is, nobody knows what is going to happen, nobody. All you can do is take your best guess and hope you do better than a monkey with a dart.

      1. I bet if I was allowed to mention his name, I could name that monkey with a dart..

    2. Mr. C, Thirteen years?…before RETIREMENT? Dude, the krewe here will be needing a nurse at best. (at least I will be needing a daily sponge bath). You’re golden ’cause you started early and can now compound in a non-zero rate environment in a conservative manner. Don’t forget some basic diversification in an IRA/Roth with small slivers when the best of those sectors are WAAAY beat down and looking dead.
      Once news about you gets out, many women will think you look more attractive and brokers will begin to call. I’ve seen it work many times.

  5. Tim, We did see A-paper mortgage rates being quoted today at 6.875% (no points) for top tier credit and at least 20% down. Appears the widely-anticipated house price declines have started. Price reductions are now evident in all markets across the country.

    Any resistance from your local lenders regarding your conservative appraisals should be completely silenced at this point.

    1. alpha–wow that is high–at 7% we will hear crickets.

      Fortunately they all know I’m not a crazy person and I get zero pushback ever–I only work with local community bankers. I fired the big outfits back in 2004 for ‘ethical’ reasons.

      1. Yet 3 mo treasury yields seem lower than before. Maybe demand is keeping prices elevated.

    2. Alpha, second call / email in a week from once or twice a year customers asking if they could return stock. For the last 5yrs distributors rarely looked at dead inventory now applying a magnifying glass. Expect to hear from more. Starting to hear how slow it is out in the building world.
      Twisted my wife’s arm to let me put in a stop loss on half her Costco stock. Eyeing a preferred and small bond. Probably too early to go in full allotment but I expect the selling to continue as nervous investors sometimes don’t like holding over the weekend. Personally, if I like it enough to buy it then shouldn’t be worried about a black Monday

      1. Charles, Glad to hear about the stop loss. I’d actually been thinking of you yesterday when Costco reported.

        Seeing similar indicators to yours. Seems this reset might be the big one we’ve been anticipating for so many years now. Not often your hear a fed official basically tell millennials not to buy because better house prices are on the way.

        Like you we’re legging into the market every day at fresh new lows. Have been flipping smaller tranches back into the market and re-buying them back same day at even lower prices than the previous batch. As the medium term goal here is to accumulate in every position, we’re not stopping for as long as it takes to reach this cycle’s nadir.

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