Author: Tim McPartland

Very early this morning – 6 a.m. the 10 year treasury was knocking on the door of 5% trading in the 4.98% area, before backing off and now trading at 4.94% up around 4-5 basis points on the day. I suspect it could take a few days before 5% is breached–but it seems to me it will make it (my wild ass guess).

In reviewing holdings my biggest hit yesterday was from CEF Tricontinental 5% $50 perpetual (TY-P)–down $2/share to the $42 area. Current yield was 5.9% area. That’s what happens when you hold a low coupon and somewhat illiquid preferred–forget that it may well be the highest quality preferred trading today. It is getting a nice bounce today (up $1.45). Last I checked their asset coverage ratio was 4200%–I suspect it is down to 4100% now.

When I see this kind of selling it makes me want to buy, buy, buy – I am tying my hands together after this note so I don’t do something irrational. Why buy at $43 when it might be $38 next month.

Today we got a number of economic pieces of news. 1st time jobless claims tumbled again–under 200,000 at 198,000–expectation was for 210,000–ugh–still looks strong. On the otherhand we had Leading Economic Indicators (LEI) come in at a -.7 softer than the -.5 expected. Existing home sales came in stronger than expected. So cross currents continue.

On top of the economic news we have way too many Fed yakkers today including Chair Powell in an hour–so we will see if these people move markets.

With the potential for expanding war in the middle east we are seeing spiking crude oil prices once again. This morning we are seeing west Texas crude trading near $90/barrel—we just had prices backing off from the $95 area we gas us all some relief at the gas pump, but now we are staring at a potential economic disaster. Or are high prices in the energy arena maybe a positive for income investors? Obviously one can’t make predictions with any certainty whatsoever–in particular in the middle east, but can a wider war drive prices to $125 or even higher? The premise is higher oil prices, over the course of many months, feed through to inflation, but also dramatically slows the U.S. economy–stagflation. Even though inflation flares up the Fed cuts interest rates because of a major slowdown in the economy. Just a thought–we’ll see.

Yesterday we had a red day once again in income issues as the 10 year treasury moved higher by 13 basis points to close the day at 4.85%.. Most us know that we (the markets) can handle moves like this over the course of weeks or a month, but there should be no doubt that moves of this magnitude are not going to be well tolerated by income issues. I didn’t calculate losses in preferreds and baby bonds but am guessing around 1/2% (on average)-ouch. This morning we have rates backing off a tiny amount to 4.82%.

Of course strong economic data yesterday–retail sales in particular, was the primary culprit in the movement of rates higher. Fed folks have been out in force and almost unanimously are now leaning dovish–for the next month. We have the release of the ‘beige book’ this afternoon so we will see what various Fed districts are seeing in their area.

This morning I have been perusing some bonds–in the 1-5 year maturity range. Just looking at investment grade issues–some tasty yields available mainly from business development company’s (BDCs). If you drop into the BBB/Baa issues (lower investment grade) you can get up to 9% yield to maturity (the hated Prospect Capital), but a much larger number of issues in the 7.75% area (yield to maturity). Because of the short duration of these issues my metric is yield to maturity–not current yield.

Well let’s see how the day goes.