Author: Innovative Income Investor

Only 3 months ago we had the 10 year treasury touching in the high 1.40%’s.

Today we see the 10 year treasury trading at 1.93%–a full 4/10th’s of 1 percent higher.

In general, we have not seen substantial damage to preferred stock and baby bond pricing. Sure we see some of the high quality very low coupon issues having trouble with ‘traction’ in moving higher, but the evidence shows that interest rates are having very little affect on pricing–so far.

Only today mSquare wrote on the new “Flipping and Dividend Capture” page that he/she bought the new AT&T 5% perpetual preferred for $24.9x on the OTC Grey market and just sold it on the NYSE for $25.6x. This shows that there has been hunger yet for ‘yield’ –even low yield.

Today Newman mentioned that he/she was getting a bit concerned with the 10 year treasury moving higher.

As income investors we all need to be concerned with higher rates, BUT one can not ‘run for the hills’ because there is no one that can predict what rates will do tomorrow and we all need some sort of income stream–it has almost always been true that money buried in the back yard earns little interest.

As the old commercial on the television used to say “speed kills” (of course talking about driving), but we know that interest rate movements can be fairly well tolerated if the movement is slow–2,3 or 4 basis points up one day and down 1 or 2 basis points the next. The move from 1.4x% to 1.93% took 90 days or so–and this move has been well tolerated.

At this point in time if we see a 1/8% spike higher 2 days in a row–that would be a bigger concern. The low coupon issues will act very badly if we get these kind of moves. Additionally the low coupon issues will act poorly even if we get slow moving higher rates–month after month after month.

Lastly we can never predict some major moves. A few years ago the markets threw a ‘taper tantrum’ simply because the FED suggested a reduction in quantatative easing. The 10 year treasury rose near 1/2% in 2 weeks–simply based on a ‘suggestion’ of a tapering that never happened.

So in summary I would encourage investors to do what makes them feel comfortable. If rates do pop and you lay awake nights – make some sales–store some dry powder–or if you fear the future–next week or next month–sell a little and hold the cash until you mentally feel better. I have made a few sales recently and am in no hurry to reinvest–more because I am hoping for some better pricing ahead. In my 15 years of purely preferred stock and baby bond investing every big sell off has resulted in the opportunity to buy good issues at low prices–so keep a little dry powder.