Author: Innovative Income Investor

It may seem like there would be no question in ones mind whether investors should be invested in interest rate sensitive securities right now–there are not too many questions in my mind about it. The ability to garner 6-9% current yields and many times to have potential for capital gains in the next 12 months should be a strong argument to get invested.

On the other hand one doesn’t want to willy-nilly throw their investment funds at just any old preferred and/or baby bond. I am at just 60% (more or less) in preferreds and baby bonds–heading to an eventual 70%, but it might take me a month or so to get there. Based upon my personal beliefs on interest rate cuts by the FOMC the capital gains I miss and the reduced coupons I collect should be minimal (assuming I am even close to correct in my personal forecast).

Yesterday I made an add to a current position–I bought more RLJ Lodging $1.95 preferred (RLJ-A). I intended to go out of my comfort zone and add a REIT or shipping preferred, but the high pricing on some of the issues–in particular the shippers deterred me from executing–I continue to look. Currently I have quite a few ‘full’ positions in my portfolios and some overweight positions–I am comfortable in these holdings and if not an intention to stay diversified I would buy more–it is a struggle to not add more, but I need to resist.

Economic news released today was pretty darned good–fewer jobless claims than expected and retail sales which showed the consumer to still be in a spending way–even if they are just racking up more debt on their credit cards. These numbers don’t argue strongly for interest rate cuts–BUT Powell is in a corner and should deliver the 1/4% cut next month.

Well we got the consumer price index numbers which were generally on forecast. So is a Fed Funds rate cut for September now absolutely locked in?

Barring any massive surprise I think there is almost no doubt that the 1st rate cut is a certainty–BUT the question remains–how large of a cut? 1/4 or 1/2%?

I think once again Powell has backed himself into a corner as far as cutting rates–continual hinting of a cut makes it a given. Of course we have plenty of data to be released before September 17-18 so the size of the cut is less certain as a bad PCE (personal consumption expenditure) number later this month could help drive this decision. Then, of course, we have PPI, CPI and employment numbers being released in September before the FOMC meeting and I think the combination of this data will drive the decision as to whether it is a 1/4 or 1/2% cut.

For now it really doesn’t matter to our investing plans–I continue to move toward increased allocation to preferreds and baby bonds as coupon available on treasuries, CDs and money markets drift lower. I find no urgency to get the shift completed because while I may forgo a 1/4% or so because of falling coupons it is no excuse to make potentially bad investments.