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Knocking on the Door of 1.20%

The 10 year treasury is ‘knocking on the door’ of 1.20%–the highest yield since last March 18th.

Inflation expectations continue to be front and center–hand in hand with the giant ‘stimulus’ package being put together by the clowns in congress.

Watching the ‘talking heads’ there is sure a lot of excitement about the summer and fall as they continue to talk about the economic rocket coming with the administration of vaccinations and receipt of ‘free money’–forget that most folks aren’t spending the money–just saving it.

I see that originally congress was looking to limit the distribution of stimulus money to just those that have a need for it–but now they are back to pitching it out the door of a helicopter to most everyone. Personally our income was sky high last year–maybe the highest in 20 years–so I don’t care whether I see money or not–would just go into savings I suppose.

Well it is -6 degrees right now in Minnesota (at my house)–think I will just snuggle up for a nap—it will be a long holiday weekend with temps seldom rising above 0–plenty of time for naps mixed in with work.

Inflation? We’ll See

Tomorrow we have the official inflation gauge released by the federal government.

Of course we can choose to believe or not believe whatever the number is that is released in the CPI report–I choose to not believe it–BUT I care how markets react to the number.

The estimate on the consumer price index is up .3% which would be a slight increase from last months .2%. Core inflation is estimated at .1%, again up slightly from the 0 last month (core inflation removes food and energy from the calculation).

I have no idea where the numbers will fall and I don’t think equity markets will give a rip–if the number is ‘hot’ analysts will say the increase is ‘transitory’ (moving from a recession to growth). The economy remains awash in liquidity and markets will probably move higher for the foreseeable future.

Interest rates markets will be a bit more cautious. Interest rates keep trying to move higher, but haven’t gotten over the 1.19% hump yet–the 10 year treasury closed at about 1.16% today. I am looking at March, 18th last year where rates popped to 1.27% which is the highest close in the last year, after dropping sharply from 1.90% at the end of 2019. So I would not be surprised to see the 10 year move into the 1.20’s%.

Does it matter if the 10 year moves higher? Almost always the move will be tolerated if it is slow. For instance if we see a move to say 1.25% in a day and then a back and fill direction–no big deal–I don’t think income issues would flinch. If rates go from 1.16% to 1.30% in a day there will be some pain in the quality issues (i.e. low coupon).

Of course I will not react to any movement—you can’t react to 1 piece of data. It is almost always a losing proposition to try to move around your positions based on a couple pieces of data–save your energy and sit back and watch.

Looking for Crazy Action in Silver Markets

I have held physical silver for many years with no intention of selling–on the other hand if someone wants to pay me a crazy high number (not sure what that would be–$100?) I might let it go.

Like Gamestop (GME) last week there is apparently a move to buy silver–physical silver and I suspect some miners. A short squeeze on the SLV ETF is mentioned-I suspect there are some penny mining stocks where there might be opportunity.

The silver ETF saw buying equivalent to 1150 tons of silver late last week. I checked my traditional supplier and they have little for sale and shipping is delayed 5-10 days. They had 1 issue of silver eagles available at $76/coin which is way beyond where the 1996 issue should be trading.

Anyway I see silver futures at $27.06 right now which is up a bit over a dollar.

As an income investor do I care? I care about any potential disruptions in markets—I don’t care what silver does (unless it goes to $100 or so and then I will gather my physical silver and bank a 1000% profit), but these things have a potential to spill over elsewhere.

We shall wait and see if anything evolves from here. Most likely this would simply be a ‘sideshow’ for income investors, but we shall see soon.

Little of This and That – Of Interest (Maybe)

Public Storage (PSA) sold a decent sized note issue today–$500 million with maturity in 2026 with a coupon of .875%. Pricing term sheet is here.

I wonder if PSA is going to start taking on more debt and move away from preferred stock financing? The ‘use of proceeds’ in the prospectus indicates that proceeds may be used to call preferred stock–next issue not redeemable until 5/17/2021 and then 8/1/2021 (the 5.40% PSA-B issue is already called for 1/20/2021). The company is under pressure from Elliott International and has recently “refreshed” the board of directors (their words).

The new ‘term preferred’ issue from Gladstone Land (LAND) is trading OTC under ticker LANPP–with a coupon of 5% I was not expecting much in terms or share price increase, but the issue took a jump today to close at $25.25. I may own a little of this–haven’t checked the limit order (small order) I had in yet.

The new investment grade perpetual preferred issue from Brookfield Infrastructure Partners (BIP) is trading under BIPFF and closed today at $24.87. With a coupon of 5% and being perpetual there may not be much juice in this one to move higher.

j mentioned today that Citigroup (C) has called for redemption their $25 6.3% non cumulative preferred (C-S) and a partial redemption of the series R 6.125 fixed to floating (not publicly traded).

Interest Rate Increases Take a Pause

Yesterday I had just written about the 10 year treasury yield hitting the 1.18% level when rates began to move off the high, which was up 5 basis points from the previous close. The yield ended the day at about 1.14%.

Today the high was 1.13% with a close at 1.09%.

With solid treasury auctions the last couple of days investors were heartened – for the moment.

This was truly ‘the pause that refreshes’–but in my personal opinion it is just a ‘pause’. But we all like a pause in higher rates and a bounce in prices–it gives a folks a chance to re-evaluate their holdings.

Below I give a couple of examples of the difference in movements in high quality, low coupon issues and low quality, high coupon issues.

Here you can see how sensitive a high quality–low coupon issue is to interest rate movements. Tumbling hard the last 5 days as rates rose, while bouncing nicely on the respite since yesterday afternoon from higher rates. This one is the Public Storage (PSA) A3 rated 4.625% perpetual preferreds.

On the other had below you can see what has been happening with a high coupon, junkier issue from Arbor Realty (ABR) 8.25% perpetual preferred. You can see the issue has been moving in a 25 cent range for the last week.

Of course other factors are to blame for movements up and down–potential redemption dates for instance. BUT newer investors need to know that the above charts are typical of price movements when interest rates rise. When rates rise investors demand higher yields–it is that simple. Low coupons are sold–high coupons are held.