With turmoil in the bond market it is certain that investors are anxious to buy securities that will likely maintain value in spite of potential higher interest rates–with a maturity in 2026 this issue will likely stay at or above $25 for a while–if we reach a time where it falls below $25 I will probably be a buyer.
Can I say ‘weasel’ anymore–don’t want to offend those poor little guys. Anyway I meant to say interest rates. After being tame 1/2 of today rates have taken off and will likely close at the highest level in about a year–up about 8 basis points.
I suspect that Fed Chair Powell said something that the traders didn’t like–maybe he was not nearly convincing enough when indicating the Fed would keep rates low for a very long time.
Regardless of the cause about 70% of the investment grade baby bonds and preferreds are down today–not too much–guessing less than 1/2% (13 cents or so maybe).
Let’s look at the positive of the move–some of us added a few quality shares last week that were lower – maybe we will get to add a few more soon because again they are moving lower again.
Tomorrow we have ‘official’ employment numbers. Yesterday we had the ADP numbers and showed lower than expected job growth–what will we have tomorrow? If jobs are weakening it is a bit hard to reconcile the higher move in interest rates–but as we all know markets do what they do and moves are not always logical.
Below is the chart with all of the new issues that have been sold since 12/11/2020 (nothing special about this date–just when I started tracking them). I do not cover ‘equity units’ on this website.
The new baby bond from Gladstone Investment (GAIN) is the only issue not trading at this time.
It is interesting to note that the low coupon, quality issues, are mostly at or below $25. Non rated issues are trading stronger. The Newtek Business Systems (NEWT) 5.50% baby bond is trading very strongly at $26.34, while the Wells Fargo 4.375% perpetual (WFC-C) trading weakly at $24.54.
Please note that the 10% Babcock & Wilcox baby bond (BWSN) is trading strong at $25.67. A cautionary note on this issue–they have been off and on operating under ‘going concern’ statements–i.e. there are doubts to their ability to continue in business. In somewhat of a ‘sweetheart’ deal B Riley has bailed them out recently–but this company is dicey–use care and do very deep due diligence.
Closed end fund Priority Income Fund has registered a new offering of Term Preferred Shares.
The new issue will be PRIF-G, if it is sold. Priority has a habit of registering new issues and then waiting weeks and weeks before consummating the deal. We shall see when this one finally is launched. If it is sold it will trade on the OTC grey market prior to moving to the NYSE.
Priority Income Fund is a Collateralized Loan Obligation (CLO) holder so folks need to try to understand the company a bit before jumping in to this investment.
Priority Income Fund, which is a non traded fund, currently has 6 Term Preferreds outstanding. You can see them here. While the issues had traded weakly previously at this time they are all trading around $25.
As a CEF the company must have a asset coverage ratio of at least 200%–as of 12/31/2020 the ratio is about 295%. Obviously after this offering the coverage ratio will be reduced somewhat.
Well let’s get some more money and toss it out of airplanes–even the Federal Reserve is behind the plan – go big (or go home)!
I haven’t watched any business news on the tube the last 2 days-they are probably giddy with irrational exuberance. Whatever–I am only watching interest rates.
The 10 year treasury yield ended last week around 1.46% after popping to 1.61% last Thursday. Now we are getting a pause with the yield falling as low as 1.40% today. Will it go higher? I would think so–the rates move on inflation ‘expectations’, not on actual inflation and while investors are fickle I am not sure that expectations change in 1 or 2 days. On the other hand we have watched for much higher rates for long periods of time only to be wrong.
Last week I added some baby bonds from US Cellular–the 6.95% issue (UZA)–a partial position–(rated Ba1 and BB)–they go ex next week and I wanted to catch that interest payment. This helps balance the few investment grade positions that I own and have taken a spanking of late.
So I am watching for the employment numbers come the end of the week–don’t really believe what I hear from the BLS, but a crazy good number (or bad) could move interest rates. A bigger number comes next week when the CPI is released on the 10th–is there inflation or not? Doesn’t matter to the Fed who would simply say that inflation is simply ‘transitory’ – they would have to say this as they have boxed themselves into a corner with dovish rhetoric on a continual basis.
So I watch and wait and act as conditions warrant. Losses in February were relatively minor and a portion has been recouped in the last few days.
The S&P500 took a bit of a spanking last week closing the week at 3811 after closing the previous week at 3907–a loss of around 2.5%. In spite of this loss the index is only 3% or so from an all time high closing high.
The 10 year treasury yield sprinted as high as 1.61% on Thursday before setting back nicely to close Friday at 1.46%. Inflation expectations and poorly received treasury note auctions contributed to weak bond prices. Higher rates contribute to higher rates – a vicious circle as potential buyer back away from U.S. Debt believing they may take an instance loss in their capital. With good fortune rates will stabilize for the coming week.
The Federal Reserve balance sheet grew by $33 billion last week–relative calm before the inevitable storm once the new $1.9 trillion stimulus package is passed.
The average $25 preferred stock and baby bond price followed the same trend last week as in the last few previous week. Theaverage issue fell in value by 10 cent, while investment grade issues fell by 20 cents and junkier mREIT preferreds were even. So once again junk issues outperform quality.
Last week we had 3 new income issue come to market.
Telephone and Data Systems (TDS) brought a new 6.625% preferred to market. The issue is trading on the OTC grey market under ticker TDSUP and closed last week at $24.85.
BDC Gladstone Investment (GAIN) sold a new baby bond with a very meager coupon of 5%–with a maturity date in 2026 it is obvious that short dated paper is very prized. The issue is not yet trading as far as I can tell.
Texas Capital Bancshares (TCBI) has sold a new perpetual preferred stock with a coupon of 5.75%. This issue is trading under OTC grey market ticker TCBLL and closed on Friday at $24.58.
Take special note of the annual total return chart (since inception–2014) in the report. The common shares have returned 4.94% annually–the term preferred’s and baby bonds would have totally smoked the common shares.
Right now as as I search for something to buy the best idea I have is to add to positions in the US Cellular (USM) or Telephone and Data Systems (TDS). Of course these are related companies as TDS owns most of USM.
Both companies have baby bonds outstanding–USM has 5 current issues outstanding which you can see here. Some of these just went ex-dividend and are trading at $25.15–both 7.25% issues. I expect the company will call some of these soon as they have mentioned the possibility. Assuming they give 30 days notice of a call (not guaranteed) there is no real call risk here. They recently sold 10 million shares of 5.50% baby bonds, but these two 7.25% baby bonds have over 23 million shares out–so whether they call them all or not is anyone’s guess.
Alternatively they have a 6.95% issue which goes ex in a couple of weeks and is trading at $25.48 which is a reasonable alternative to the 7.25%. This issue is currently callable.
TDS has 4 outstanding baby bonds which you can see here–they are all currently callable. All of them are trading at a relatively attractive price.
TDS also just sold a new preferred with a 6.625% coupon which is trading around $24.89 under OTC ticker TDSUP.
For those looking to reduced share price movements it is always helpful to keep your eye on the term preferreds and short maturity dated baby bonds. You can find that list here.
I have taken a coupon small ‘leg in’ positions in some of the USM issues today and I bought the TDS new preferred on issuance. I know that Gridbird and many others are already ‘working’ these issues–so this has been discussed–but for those that aren’t owners I think these are pretty decent issues for a fairly tasty dividend/interest payment.
With about 65% of baby bonds and preferreds being down today there is no doubt that investors in income issues are taking a bit of pain today.
It is always disappointing to have a losing month–but I am focusing on the improved current yields on some issues that I would like to own for the long haul–quality issues (or mid level issues that are technically junk, but decent junk). Think about all the 5% coupon issues that none of us wanted to buy—honestly they are still too high, but approaching more tolerable levels.
Many of these low coupons issues are way down from the end of December. Here is a 4.70% coupon issue (PSA-J) from Public Storage (PSA)–it touched near 28 in December and is now down $2.50 from those levels.
The only question is how high will rates go? Of course no one knows the answer to this question—so I always suggest that if one wants a new position during rising rates that you ‘leg in’ to a position. If you want 500 shares buy them 100 shares at a time–with no commission costs to speak of there is no harm in multiple transactions.
Below is a snapshot of all new income issues (preferred stock and baby bonds) which have been issued since 12/11/2020–20 issues since that time.
As shown some of the junkier issues have traded stronger than investment grade–a good share of the investment grade issues remain around (or below) $25/share. I suspect the investment grade issues will have trouble gaining too much traction given their very modest coupons in this time of rising interest rates.
Business development company (BDC) Gladstone Investment (GAIN) has announced they will be selling a new issue of baby bonds.
The company will sell the baby bonds, which will carry the ticker of GAINN, to redeem their 6.25% term preferreds (GAINM) currently outstanding, which have been redeemable since 2018. The new issue will have a maturity date in 2026.
Last week the S&P 500 traded in a range of 3885 to 3950 before closing the week at 3907–this is about a 7/10% loss on the week.
The 10 year treasury yield traded in a range of 1.24% to 1.36% before closing the week at 1.345%. This is a sizable gain of 14 basis points above the close on the previous week.
The Federal Reserve balance sheet jumped by a giant $115 billion to $7.55 trillion–the highest balance ever (of course).
The average $25/share preferred stock fell by 13 cents. Once again, because of the continuing jump in interest rates, the high quality issues fell the most with investment grade issues falling by 25 cents. Banks fell by 14 cents, mREIT preferreds rose by 10 cents and shipping rose by 8 cents.
Investment grade issues have now fallen about 4% from their peak which was around the start of the new year.
January was a very good month for me with lots of dividends/interest showing up in account and share prices holding steady. February not so good–but no surprise to me.
I had begun to move out of the higher quality issues a few months ago–primarily because many were very overvalued–Gabelli CEF preferreds etc, but I purposely didn’t move out of all of them. Reflecting on my history I have never been one to stick around and wait for capital losses, but I have moved on to a different stage in my income investing. This means I keep holding some issues just because of their quality–choosing quality (safety) for a small portion of my holdings–a very safe income stream which is blended with junkier issues.
Balancing the high quality holdings I have added higher coupon issues–more risk, but less reactive to higher interest rates.
So here are a few of the results of that move.
Quality issues have suffered. Shown below are charts of 2 investment grade preferred issues and their poor share price performance during the last number of weeks. The Rivernorth/Doubleline Opportunity Fund (OPP-A) which is A1 rated by Moodys has been beaten badly with the modest 4.375% coupon.
The second is a newer issue of biotech royalty company Xoma. This 8.625% issue (XOMAP) is trading strongly in spite of higher interest rates-additionally because it was a newer issue trading under $25 liquidation preference investors were drawn to the value pricing (in the eyes of the beholder of course).
So we see the very typical pattern during times of interest rate increases–quality trades weak while junk trades relatively flat. Income investors demand a higher yield as interest rates increase–so they sell the low coupons to move to riskier issues.
The question then becomes should an investor buy more of the quality issues as rates rise? If you liked it at $25 should you love it at $24?
This depends on your opinion of interest rate movements and what you goals and objectives are at this point in your life.
I believe rates will likely continue to creep higher (hopefully slowly) as massive amounts of money chase goods and services causing some inflation. Being that I am 68 this year I also like the safety of investment grade issues. For me YES I will buy more as prices fall–I unloaded issues a month or two ago as their prices were out of control to the upside, but as they fall I will have to choose my buy points and start increasing my quality positions again.
For the month of February I am pretty much breakeven, which I am happy with as rates have risen–but I think March will be better unless we have an ‘event’.
Over the last month or two I have seen it mentioned that some folks believe that the fixed to floating rate issues might work well in a rising rate environment.
No one should forget that the ‘hedge’ against rising rates is based on 3 month Libor–not on long term rates (i.e. the 10 year treasury).
Here is a chart of 3 month Libor going back a year — note that 3 month Libor hasn’t risen–in fact is falling a bit now. Obviously the yield curve has steepened greatly as short rates remain low while long rates surge.
So the point simply is that at this point in time we don’t want to assume that 3 month Libor (or some replacement rate as Libor is going away sometime in the future) is a great help looking out into the future.
The good part is we don’t have many issues flopping over to floating rates anytime soon–just 4 issues in 2021 and 3 of those are Customers Bancorp (CUBI) issues.
Just looking over the investment grade preferreds and baby bonds I see lots of red as the 10 year treasury has spiked around 9 basis points today.
The losses are not very large in size–1/2% up to 1%. No big deal–BUT we are reaching the point where investors might panic out of shares. We’ll just see–likely a setback of rates will occur tomorrow which should take the ‘edge’ off panicky types–for now.
SPKE is not an energy generator–just a retailer. The company purchases and resells electricity and natural gas–but mainly electricity.
They have stated that they ‘hedge’ energy purchases for normal weather conditions–obviously not what we have had lately. The potential problem I see is that they likely had to buy energy on the ‘spot’ market during the last week and it is an unknown as to whether they were adequately hedged. This latest cold snap has the potential to be disastrous to the company.
Obviously I have no knowledge of the company’s hedging–but if I was a holder I would lighten up here at the most recent price and await further news–better safe than sorry.
The S&P 500 rose rose by about 1.5% last week as it traded in a range of 3885 to 3937 before closing near the high at 3935–another week and another record high.
The 10 year treasury traded in a range of 1.13% to 1.20% and closed the week out last Friday at 1.20%–the highest close in almost a year. I note that the yield is 1.247% this morning.
The Federal reserve balance sheet grew by about $32 billion last week on the never ending march higher.
The average $25 preferred stock and baby bond fell by 7 cents last week. Investment grade issues fell by 17 cents, banks fell by 13 cents, mREIT issues rose by 13 cents and shipping issues rose by 15 cents. Again, for the 2nd week in a row, junky preferreds and baby bonds outperformed the quality issues. It is very common–and we have mentioned it here so many times–in a rising interest rate environment low coupon, high quality issues will suffer while junky high coupon issues will outperform. If rates move sharply higher in a day or week all issues will move lower–but junky issues will move lower at a slower pace.
There was just one new income issue last week as Ready Capital (RC) priced a new issue of baby bonds with a coupon of 5.75%. The permanent ticker is RCC. This issue has not traded yet.
The 10 year treasury is ‘knocking on the door’ of 1.20%–the highest yield since last March 18th.
Inflation expectations continue to be front and center–hand in hand with the giant ‘stimulus’ package being put together by the clowns in congress.
Watching the ‘talking heads’ there is sure a lot of excitement about the summer and fall as they continue to talk about the economic rocket coming with the administration of vaccinations and receipt of ‘free money’–forget that most folks aren’t spending the money–just saving it.
I see that originally congress was looking to limit the distribution of stimulus money to just those that have a need for it–but now they are back to pitching it out the door of a helicopter to most everyone. Personally our income was sky high last year–maybe the highest in 20 years–so I don’t care whether I see money or not–would just go into savings I suppose.
Well it is -6 degrees right now in Minnesota (at my house)–think I will just snuggle up for a nap—it will be a long holiday weekend with temps seldom rising above 0–plenty of time for naps mixed in with work.
In 15 years I have never posted something ‘just because’ it was funny–but for someone as old as me to damn near fall off my chair after watching a you tube video of a court hearing–it must be pretty good or I am just plain warped.