Innovative Income Investor | Innovative Income Investor

Unemployment Claims Remain Tame

Yesterday we got 1st time unemployment claims which came in at 219,000 which is relatively tame compared to a forecast of 224,000 BUT continuing claims came in at 1.91 million which is up from last week which was at 1.87 million. As I have mentioned I watch the employment numbers very closely–they are the ‘canary in the coal mine’ relative to the overall economy. It is tough to see the economy falling off a cliff if everyone that wants a job has a job.

Interest rates right now seem to be ‘stuck’–right at 4.60% (more or less). What is going to push rates higher–or lower? GDPNow from the Atlanta Fed is showing 3.1% as of 12/24/2024–if this is close it will be no help for lowering rates. Employment is not looking to be of much help for lower rates. The scariest thing from my perspective is we have no real idea on what government spending will be down the road (actually we all have opinions for sure)–are the bond vigilantes going to take over and ‘force’ discipline on the government? I don’t know the answer, but I am certain that there are some money folks out there that are licking their chops at the possibilities for making a killing in the debt market if something goes wrong.

Speaking of Bond Vigilantes here is a Pimco article from 12/9/2024.

Interesting Reading on Leveraged Loans

The CLO owner company’s – Eagle Point Credit, Oxford Lane etc, hold portfolios of leveraged loans–loans to company’s rated BB or lower. As such I watch the data on the overall collateralized loan obligation (CLO) market whenever I can find it.

Here is an article from S&P Global on defaults etc in the leveraged loan sector. It is one of the best overviews of the market that I have seen in quite a while.

Headline of Interest for Holders of Preferred Stock and Baby Bonds

News is always slow until earnings season, but today (and likely tomorrow) are incredibly slow–I think everyone has taken an extending holiday.

Mortgage Rates Continue to Rise

Hyperscale Data Completes $50 Million of the Aggregate $75 Million Preferred Equity Investment from Ault & Company

ARMOUR Residential REIT, Inc. Announces Guidance for January 2025 Dividend Rate per Common Share

Bought Some OFS Credit Term Preferred

I bought shares of CLO Owner OFS Credit 5.25% term preferred (OCCIN). While the coupon is rather low the yield to maturity is pretty good at just under 8% (maturity is 12/31/2026).

OFS is a rather small closed end fund–just $240 million in assets. They use term preferreds as their sole leverage. Their asset coverage is near 2.61 times (as of 10/31/2024)-which is a bit lighter than I would like, but adequate–of course I always watch coverage ratios closely. Their most recent report can be read here.

This yield to maturity is a good step up in return from those issues I sold earlier today–I expect it will work well and should arrest some of my capital losses (of course nothing is 100%).

Now on to see where I might do some more swapping of low coupon issues out for higher total return issues.

Plotting My Next Moves

I’ve continually wrote of my current belief that interest rates (long rates) may go higher–simply because of the supply of Treasury debt that has to be sold for the foreseeable future. Thus far I see no real reason to change my thoughts on this topic. Yes I have heard lots of political bluster, but will any of the talk translate into to action? I guess I am at the point where I am going to have to see a sustainable drop in longer term rates to convince me that we are heading lower.

With my 7% annual goal I am going to have to continue to cut some low coupon, high quality perpetuals from my portfolio and opt for riskier issues–there may well be no other way to reach my goals. By nature I am very conservative person, but I am going to force my self to lower the overall quality, while raising the coupon, but shortening the duration (certainly compared to ‘perpetual’). Most of us know that short duration baby bonds or term preferreds will be less volatile than perpetuals and the closer they get to redemption the nearer they will will move toward $25 (up or down).

I will be selling some, or all, of the Bancroft Fund 5.37% (BCV-A) perpetual preferred which is trading at $22.82 with a current yield of 5.82%. This is rated A1 by Moodys so is a very highly rated issue–but highly susceptible to capital loss with higher interest rates.

Additionally I will sell some (or all) of the RiverNorth/DoubleLine Strategic Opportunity 4.875% perpetual preferred (OPP-B). Again A1 rate and highly suscepectible to capital losses. Currently the issue is trading at $19.08 for current yield of 6.22%.

The risk of swapping issues is that the money doesn’t get reinvested soon enough and one leaves it in money market for months–it is my plan to get the proceeds of the sales invested before the week is out and I will get the purchases posted as soon as they are made.

My portfolios are off their highs by maybe around 1/2% and I would like to nip the slow downward trend in the bud now. After executing these moves I will sit back and see what happens in the economy and interest rates.