Author: Tim McPartland

Today we have the producer price index (PPI) on the calendar—the forecast is for prices to decrease—both the headline and core. After the hot CPI numbers yesterday this would be welcome. We also have a gaggle of Fed yakkers today–at least 4–to them I say ‘shut up–if you don’t agree on the future fine–but none of you knew what to do when we were at zero interest rates and none of you know what to do now. Let’s be data dependent!

Yesterday ended up being fairly painful–most of our accounts were down around .3%. It has been so long since we have seen losses like this that the reality of the loss is better than temporary mental pain. I suspect with our portfolios only 1/2 invested in preferreds and baby bonds and a steady stream of interest payments coming in that this loss was minimal.

Yesterday the 10 year treasury closed around 4.56%–17 basis points above the previous close. It has been a long time since we have gotten a spanking like this–I don’t think we will see a rise like this anytime soon–even a hot PPI today won’t get this reaction. BUT as I have mentioned time and time again I believe that we will see rising rates later in the year as treasury issuance of new debt overwhelms demand and investors ‘demand’ higher payments. We’ll see.

Obviously no buying or selling yesterday for me–can’t see any today or tomorrow excepting for CDs as more maturities of CDs keep rolling in. We’ll see what prices do–maybe next week I will add to issues that have been beaten down, but with my outlook on rates it doesn’t seem to make sense to add anything but shorter dated maturity issues.

Equities are off this morning–not dramatically, but 1/3%. After yesterday we could well see a bounce if PPI comes in at forecast, but we are going to have lots of uncertainty in the weeks ahead so it would seem to me (and what do I know?) that upward traction will be hard to come by with inflation keeping the pressure on interest rates.

With the hotter consumer price index this morning interest rates moved a full 12 basis points higher—up around the 4.50% area—ouch.

Holders of high quality, low coupon perpetuals and baby bonds with LONG dated maturities are experiencing some pain–the amount of pain is dependent on the construction of your portfolio. Short dated maturities have experienced significantly less pain. Even with my conservation portfolio construction I am off around .3% today and that is plenty painful.

For instance 2 of my bigger losers are the WR Berkley 5.7% baby bond (WRB-E) with a maturity way out in 2058—off 60 cents last I looked. The other larger loser is the Affiliated Managers Group 5.875% baby bond (MGR) with a 2059 maturity–off 54 cents.

IF one thought this was the high in interest rates one might say there are bargains being created today. Unfortunately I don’t believe we have seen the high–so of course i am not a buyer of long dated maturities in baby bonds or perpetual preferreds.

Certainly, I am not a seller of anything today–some issues which are falling I wish I didn’t own TODAY—but they are solid and will, over time, bounce back. This is simply life if you invest in anything at all.

We have just 30 minutes until the release of important inflation data with the consumer price index (CPI). The reason this should be considered important is because the Fed ‘claims’ they need to see a number of good data points before they cut rates. Since we are looking at June at the earliest and more likely July or later before we see a rate cut we need to see good data points starting now.

Now do I want to see rate cuts? I have mixed feelings–I am really liking that folks that want my investment dollars are forced to pay me to use it. We went through a period of 10 years where we were lending money to banks etc and they didn’t even have to pay us (much). On the other hand the longer rates stay at elevated levels the deeper the hole the government is digging for itself as cheap treasuries mature and high coupon debt is sold to replace it–and we all know this will come home to roost at some point in time.

So the forecast for the headline inflation number is 3.4% (year over year) which would be up from 3.2% last month. The core rate is forecast at 3.7% versus 3.8%. Obviously we need numbers within a 1/10th or so on these to keep markets stable–if we are off by a number of 1/10th it is possible we see some fireworks in equities and/or interest rates.

My personal take on inflation is it is not slowing much (if any)–this is based on almost nothing. I do almost nothing when it comes to paying the household bills–I seldom ‘shop’–seldom buy groceries–my wife runs everything around this house. What do I do—work, work, work. But even though I do little shopping etc I do see some signs of continuing inflation–today what caught my eye was the cost of a 1st class stamp is likely going from 68 to 73 cents. Honestly I was shocked–I thought stamps were around 50 cents–talk about out of touch. I do buy fuel for my vehicle–and that is way up in the last number of months as west Texas intermediate trades up in the mid 80’s. I have completed a number of new construction house appraisals lately and I can guarantee prices remain sky high – you don’t get much for $500,000 anymore at least in Minnesota. Well we will see what happens shortly.

As noted I purchased a add on position to my Carlyle Credit Income Fund 8.75% term preferred (CCIA). No other purchases are contemplated this week–always subject to change of course.

The 10 year treasury is steady right now at 4.36%–obviously awaiting news. Equities are also little changed–we’ll see if this remains the case in a few hours.

Yesterday we had a spirited back and forth in the ‘Sandbox’–I fully understand the strong feelings folks have about things like student debt forgiveness etc. You can’t believe (or maybe you can) how hard it is to write each day without bringing politics into my writing—BUT I just have to avoid it—our website won’t survive if we go down the political path.

Please refrain from going down the political path–I know it is difficult, but we will all have a better, more peaceful place to hang out. Thank you for your restraint.

The obvious answer to my question is that we have no idea–although I spend plenty of time pondering the question. Everyday I look for ‘bargains’ in the preferred stock and baby bond arena and I simply don’t find issues that I want to buy very badly—when interest rates move higher most of the time we are going to start losing capital so what is the point of buying when we have solid competing alternatives.

When we have rates at a relatively high rate and threatening to go higher we will have to do what we have done in the past–buy term preferreds and short dated baby bonds. This is the best solution to higher returns when starring at potential loss of capital because of high interest rates. By and large going this route fits my plan pretty well. This necessarily means that purchases of safe (but low coupon) longer dated baby bonds and of course perpetual preferreds have to be minimized (for the time being), which hurts my balanced approach, but with 5.3% CDs right now one can have the ‘safe’ investments in money markets or CDs and forego about 1/2% of coupon.

Right now I have the Hennessy Advisor 4.875% baby bond issue (HNNAZ) with a 2026 maturity on my list and have the prior mentioned good til cancelled order in for some shares. Today I will add an order to buy more 9I already have a position) of the Carlyle Credit Income Fund 8.75% term preferred (CCIA). Shares are now at $25.40–an ok price to buy right here—this is a monthly paying preferred.

This morning the 10 year treasury is at 4.39% which is lower from the close of 4.42% yesterday. Tomorrow and Thursday we have important inflation news with the CPI and PPI–will interest rates plunge or skyrocket after the release of the numbers? Who knows!! I stick to my thoughts that this coming fall (or winter) we will have long rates going higher–regardless of what the Fed does to the Fed Funds rate–there will be a moment in time when buyers of long debt ‘demand’ a higher payment from an insolvent government–seems logical to me as I demand a much higher reward from a junk company than from an investment grade company.