Author: Innovative Income Investor

This morning we got some pretty hot producer price numbers—not that these will stop the FOMC from lowering rates next week. As typical the FOMC had their finger in the air and know that not delivering a cut would cause dramatic consternation in markets. On the other hand it gives a bit more ‘cover’ to pause cuts in 2025. To keep markets ‘happy’ maybe they will slow the runoff of the balance sheet by $20 or $30 billion monthly–this would help markets have the ability to soak up some of the trillions of deficit spending and resultant debt issuance by the treasury.

Regardless of what the Fed does in the next few months the 10 year treasury yield has started moving higher and is now at 4.30%–up from the election ‘sugar high’ low yield of 4.14% just a week and a half ago. Could it be that with the election over investors are starting to worry once again about the massive treasury deficits next year?

These are important questions for income investors. Certainly many of us just want a nice, safe 5-7% and if share prices move around so be it. But watching capital erode during a time of uncertainty is never ‘comfortable’–in particular at times when the money market and CDs will still pay us 4.50% or so. A decent argument for sitting tight right now and letting some of the smoke clear.

Some comments have been occurring on the new term preferred from Pearl Diver Credit (PDCC) (the new issue has not yet been priced). The question some folks have is why invest in a new CLO company that is externally managed? There are plenty of tried and tested companys in the space–no need for a new investment option. I agree—I have issues from Eagle Point Income (EIC), Priority Income Fund (PRIF), Carlyle Credit Income Fund (CCIF), Oxford Lane (OXLC), Eagle Point Institutional (EII) and from newer player Sound Point Meridian (SPMC) most of which have proven management (except Sound Point Merdian which maybe I could have done without). At this moment I don’t have any of the Eagle Point Credit term preferreds or baby bonds (ECC) in my holdings for some reason. So while new companys are always welcome to issue term preferreds and short duration baby bonds until they get some history behind them I won’t be buying Pearl Diver and I am even considering unloading my Sound Point Meridian for the same reason.

CLO owner and CEF Pearl Diver Credit (PDCC) has announced they are selling a new term preferred stock issue with a mandatory redemption in 2029.

PDCC is new to me and certainly to the exchange traded preferred marketplace–this is their 1st issuance. The fund just went public in July, 2024 when they sold 2.2 million shares at $20/share.

PDCC held net assets of approximately $127 million after their public offering–no leverage was employed at this time. At the time of this new term preferred offering net assets were $134 million–with no leverage employed.

It is expected that net assets will be around $161 million after giving effect to this new term preferred offering. So the new offering is expected to be around 1 million shares.

The preliminary prospectus can be read here.

So the consumer price index came in right about as expected—must be time for equities to party at least that is what is happening. Back in July the S&P500 had a setback of about 5%, but other than that there have been no setbacks that are worth noting. Buckets full of money overcome everything–and there remains plenty of cash rolling around to fuel stocks even higher. Even as equities go higher and higher the amount of money in money market funds continues to grow. ‘Katie bar the door’ if we get any kind of shift in allocations of these funds. I don’t see that happening with rates in the 4.50% area—maybe below 4% we will see some movement—no one knows, but for now I like a 4.5% rate for idle cash.

This is a monthly chart on money market funds.

Interest rates are flat or up or down 1 basis point. The talk now is a cut and then a pause by the FOMC–even heard talk of a reversal and potential for rate hikes next year. The latest forecast from the Atlanta Fed is for 3.3% GDP growth for the current quarter—with decent employment and good GDP growth, but inflation numbers above target, it is hard to make a strong case for rate cuts.

The uncertainty for the next few months keeps me from going ‘all in’ on perpetuals, but with plenty of shorter duration baby bonds out there to buy with yields in the 7-8% area I am not going to lose sleep over allocations too much right now.