General Commentary | Innovative Income Investor

Nibble a Little and Planning for Lower Future Interest Rates (clarified)

I took a nibble–no it was a double nibble on a new ‘hiding spot’ issue yesterday. I bought the Raymond James 6.375% fixed to floating preferred (RJF-B)–as usual I paid a bit more than I wanted to–$25.16–oh well as I see it is better than 4.3%.

The issue was originally issued by TriState Capital which Raymond James acquired 6/2022. This is one of two issues TriState had outstanding and the other which was a 6.75% fixed to floating issue with a more meager spread than the 6.375% issue was called on the 1st available date in 2023.

This issue is a fixed to floating issue that will go to floating on 7/1/2026 at 3 month SOFR (plus the tenor adjustment of .2616%) plus a spread of 4.088%. Not a giant spread, but for an investment grade issue this would be in the neighborhood of 8.4%. This is a more marginal issue relative to a likely call, but at the current yield of 6.3% it should work whether it gets called or not. Additionally this one has about 5 quarters to run before the floating period (clarification–issue became callable on 7/1/2024, but doesn’t start floating until 2026–thank you mbg). Thus there are a few cents of call risk in the issue right now.

While I have been fixated on hiding spot issues the last number of days I am going to shift gears a bit. Are interest rates going lower? I certainly don’t know, but I have some doubts of much lower rates, although when the next recession hits someday we could see rates tumble. When we start getting lower rates we want to be in some securities that are going to provide that 10% capital gain along with the coupon rate. Obviously this is a timing play and we know none of us can always (maybe never) get this call right. But what the heck–I need to look NOW for those potential securities–mostly perpetual preferreds.

So I will likely start to publish some of my best guesses of some choices for that time when we see rates starting to push lower.

Stocks Party While Interest Rates Pop Higher

Well equity markets are ripping higher to start the week–apparently the belief is now the tariffs to be imposed on April 2nd are thought to be less onerous than originally believed–unfortunately it will take just a tweet to turn this around and send stocks back down again.

At the same time tariffs are believed to be less onerous the result is to send interest rates back higher as the fear of recession is tempered somewhat. The 10 year treasury has popped 7 basis points up to 4.32%–really no effect on income security prices–guess folks are getting used to these moves and are starting to ignore them.

I have 3 good til cancelled buy orders in–2 are nibbles and 1 is a ‘double nibble’ of a issue that will be new to the portfolio. As you would expect 2 of the 3 are off the ‘hiding spot’ list, while the 3rd will soon be added to the list. None of these orders has executed as of noon (central) today—damned spreads are wider than one would like and I’m not motivated to chase the prices higher.

I have a number of issues to add to the hiding spot list—but I don’t want to get out too far in the future on the list issues, because we can seldom predict interest rates tomorrow–let alone 2-3 years out. If interest rates go higher or lower from here those issues that I believe are good hiding spot issues will no doubt change.

Time to Turn the Boob Tube On

It is a rare day that I turn the TV on during the day—but today is an exception as I do have an interest in what Jay Powell will have to say at 1:30 (central).

I am pretty certain there will be no change in interest rates now—but I am not sure what he will say about tariffs and the labor market.

No matter what will be said it is highly likely we will see the S&P500 spike up and down as the algo hang on every syllable of the ‘statement’ and then Q&A with Powell. This is interesting to watch–but in no way will it make me want to buy or sell—or jump off a high building.

One thing we know for sure is that all the pundits, whether it be on CNBC or Seeking Alpha will have something to talk about for the next few hours–or days. That’s all it will be is talk–the markets will tell us what they think by moving up or down–I don’t need the opinion of all these folks.

Are You Ready for Fed Day?

Of course what I am really asking is are you ready for more volatility? If your portfolio isn’t positioned how you want it now you may be kind of late to starting arranging your holdings. On a day like today all one can reasonably do is sit back and watch the action–no need to be thinking about buying or selling today because whatever happens today will be gone on Thursday and we will be on to the next ‘worry’–while continuing to ‘shop’.

Today we had housing start released and they showed surprising strength at 1.5 million units versus a forecast of 1.38 million units–but this just balanced a revised plunge in January. Its funny that the homebuilder confidence index tumbled to 38 which was 3 points under forecast. Without help from interest rates the home builders could hit a wall pretty soon–not yet, but if we tip into recession and unemployment rises there is going to be trouble. Our next BIG piece of economic news will be the personal consumption expenditures (PCE) report which will be released a week from Friday. And of course on a daily (maybe hourly) basis we have tariff and other geopolitical items to deal with.

I was surprised today to log into one of my accounts and finding I actually bought 100 shares of the Hennessy Advisors 4.875% baby bonds @24.31. Shares were trading at a wide spread when I entered my order–the ask was 20 cents above my bid. I am happy with this small buy, but will enter another order at a lower level–say $24.10. The small buy brings my position up to around 1/4 of a full position so I have plenty of room to buy and improve my overall coupon over CDs and money markets.

So let’s all kick back and wait for the 1 p.m. (central) announcement on interest rates and more importantly the Powell presser which will follow at around 1:30 p.m.

Markets “Settling In” to Chaos

It appears to me that markets are ‘settling in’ a bit to the Washington chaos—focusing a bit more on actual economic data instead of moving on each bit of commentary from the administration. Maybe it is just me–but market movements are not dovetailing with what I read. Regardless of the market movements Friday and today I’m not feeling a high level of comfort—always waiting for another shoe to drop.

Today is a nicely green day for us–partially caused by the CHS preferreds going ex-dividend and then bouncing right back up after the exchanges marked them down by the dividend amount. Folks still want to own these issues, although I am expecting a weak quarter (or maybe year) for them. The ag and energy markets are so-so at best and they could be negatively affected by tariffs. CHS will survive just fine as they have for years—they have bad years—when you are in the commodity markets like they are you can’t win all the time. All in all the income markets are green today–the 10 year treasury yield is drifting a bit lower–now around 3 basis points lower at 4.28%–maybe just hanging out waiting on the FOMC meeting.

Last week as mentioned I did a little buying. I added to the MidCap Financial Investment 8% baby bond (MFICL) and the Priority Income Fund 6.625% term preferred (PRIF-F). I did sell 1 issue and that was the Priority Income Fund 6% term preferred which ran up on a redemption notice–I sold to be able to move into the ‘F’ issue.

I have identified 2 additional issues in the current portfolio that are of such a size that I can nibble a few more shares so I will be looking for an opportunity to do a little buying–but just a little for now.