Author: Tim McPartland

So we have had almost 2 months where interest rates have been trending higher—the last time we had the 10 year treasury under 4% was back on 2/2/2024—from there it has been a constant push higher. During that time frame economic news has not been friendly to rates as jobs have held up well, retail sales have grown at a rate above expectations and inflation numbers have held at or even above expectations.

The Fed continues to hint at rate cuts—which in my opinion was a major mistake. It makes no sense to promise (or near promise) rate cuts without seeing the ‘data’—last I knew they claimed to be ‘data dependent’ which obviously they can’t be if they are promising rate cuts somewhere in the months ahead.

As always we, as investors, have to use our thinking–what am I seeing and what logical conclusion does my thinking lead me to relative to investing?

So now, I see no reason for the Fed to cut rates–the data taken as a whole does not warrant a cut. This morning we got a housing starts number that came in soft–down 14% month over month which translates into a shortfall of over 200,000 units. While this is a soft number it moves a lot from month to month and 1 month doesn’t make a trend.

We have seen quality, low coupon, perpetual preferreds, and very long-dated maturity (out 30 or 40 years) baby bonds move sharply lower as rates have shot higher. Does one buy? It seems logical to me that with competitive rates in the money markets, CDs, and short maturity treasuries at 5% or higher that it makes little sense to be a buyer–but on the other hand if one is an investor looking for solid income (less concerned with capital levels) maybe it is a good time to buy–at least some nibbling. So everyone is different–every single one of us.

I am looking only at positions I currently hold for any possible small nibbles—as shown on my laundry list of holdings. I am looking for safety today–so will possibly take a nibble or two on a CEF preferred. I would consider a term preferred at the right price–although I am loaded pretty heavily with term preferred already. We’ll see what the day holds (or maybe a week)–not desperate to do anything–but would take a nibble on a perceived bargain.

Wow the 10 year treasury is now trading at 4.63%–all based upon stronger retail sales continuing at strong levels. The consumer is saying buy, buy, buy–probably taking the credit card out as they just can’t help themselves.

Equities which started the day solidly in the green just couldn’t old gains as interest rates rose and the S&P500 is now down almost 1%.

Accounts are mostly red again today–worse than last week. I am eyeballing the RiverNorth Opportunities Fund 6% preferred (RIV-A) for my ‘safe’ bucket as it is off more than a buck in the last week with current yield approaching 6.50%–we’ll see if I take a nibble–maybe tomorrow. I like this issue at 6.50% with a A1 Moodys rating.

Well let’s see where the afternoon goes—no doubt there a fair amount of fear in the markets. I am not a seller–and not yet a buyer, but maybe soon.

I just noticed this article which covers some issues the mortgage market is currently having—rates have moved sharply higher in the last week.

Here is my observation in this area of Minnesota. Many, many houses are sold with FHA or USDA loans—mostly with little to no money put down on a down payment. Realtors were many times telling folks that ‘yes rates are high’, but ‘when rates come down to normal rates you can refinance and lower your payment’ – implying 3-4% rates were normal.

Us ‘old folks’ know that 3-4% were abnormal rates–the exception, not the rule. When you have a giant sized portion of FHA and USDA loans you are in dangerous territory–when you have no ‘skin in the game’ so to speak just walking away is pretty darned easy.

We’ll obviously have to see where rates go, but the higher they go not only will we see a slower housing market, but the level of foreclosures will begin to rise. High rates for a few months–no big deal. High rates for a year or two–trouble.

Well it is Friday and from an interest rate perspective it has been a tough week–the 10 year treasury is now trading at 4.54% after hitting a high of 4.58% yesterday–20 basis points higher than the close last week. Of course we lost some money this week, but it has been a long time since we have had a losing week and with the high allocation to CDs these losses are very manageable–but I hope we don’t see these losses on a regular basis. I haven’t calculated the average $25/share preferred and baby bond loss on the week, but I would be surprised with anything less than 25 cents/share–I am guessing more like 50 cents. On the other hand we all know that if you had some shorter duration term preferreds and/or baby bonds your loss might have been just a dime or so—portfolio construction makes a huge difference.

Yesterday we saw a producer price index (PPI) number that was better than expectations. 1st time unemployment claims were at 211,000 versus a forecast of 217,000. Employment is not showing any signs of stress–certainly not any that is adequate to make the Fed think they are too tight–as you might remember I think the Fed is looking at employment as a key indicator.

You likely saw that short seller Fuzzy Panda (yes really Fuzzy Panda) has come out with a hit piece on Globe Life (GL) which has a baby bond outstanding (GL-D). The baby bonds fell to $14.94 late yesterday. I read through the accusations and all I can say is WOW. Either this is a company out of control OR someone has a vivid imagination. Whether this is balony or not I don’t get involved in this stuff–I have plenty to worry about without involvement.

So I close the week sitting on my hands–no buys or sells. For those believing interest rates have peaked there certainly were bargains available this week—even I am tempted–maybe next week.

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.