FED Cuts by 1/2%

For those not watching the news the FED has just cut the Fed Funds rate by 1/2%.

‘Talking our book’–I hate this–there goes our money market 1.50%. Of course I thought this would happen Sunday night and everyone this morning thought it would wait until the March meeting mid month–surprise.

33 thoughts on “FED Cuts by 1/2%”

  1. Folks, we all hate to see lower rates, but the fed has no choice. They can’t leave the yield curve inverted, if they did we would be in a recession quickly and our preferreds would tank like ‘08. All they do is follow the bond market with a lag. Get use to lower for longer. That’s the world we live in now.ATB

  2. I would say we are living in Bizaro World. CPI inflation rate is 2.5% and 30 year treasury is about 1.6%. This is not normal on earth. In February the 30 year TIPS auction set record low .25% coupon and record low real interest rate of .26%. Right now the real yield is .04% so about zero. About 6 months ago I bought 30 year TIPS at Treasury auction and those gone up 13% in 6 months so I’m pretty happy about that. The 30 year treasury is up too. This is because price moves inverse to yield. I think someday people will be jumping out of windows over those 1.6% 30 year treasuries but meanwhile they should “stand ready and act as appropriate” lol.

    1. P, In the 1940s we had 10 year treasury in low 2% and inflation running 12%-17% several times that decade. Its been crazy before. Im not implying its good or normal though. 🙂

  3. What a relief that any parts of the economy struggling under the Fed’s 1.50%-1.75% can now thrive at 1.00%-1.25%.

  4. Tim .. the Fed. reserve, rate cut .. is going to hurt the economy. not help here comes… inflation..

  5. I don’t quite understand Trump’s statement, i.e., “the Fed cut rates, finally. We have to be competitive with other countries.” Say what? With the constant borrowing the US has to do it would seem to me that what the US needs to do is continue to be competitively high enough in its rates to keep attracting money to pay its ever growing debt. In the meantime, what’s the consequences to all those companies we preferred and baby bond owners tend to buy who rely on interest income to pay the bonds and preferreds? And what are the consequences to Baby Boomers as a group reliant upon fixed income? As a class Boomers are now being thrown under the bus aren’t they? Raise taxes on them according to one party, lower their fixed income returns via ever lower interest rates as per the other, it seems as though Baby Boomers have finally ceased being the generation driving the bus, they’re under it…

    1. 2WR, I depend on the interest/dividends on my baby bonds and preferreds to provide for me retirement, so the Fed cutting rates by 50 basis points is certainly not helpful to me. Also, I used to help manage some funds for a county pension plan and this is also not good news for the defined benefit plans that are underfunded. The funding level for the state pension plan here in Pennsylvania is about 60%, and it will likely keep dropping if they are unable to earn anything on the fixed income portion of their portfolio.

  6. For us long-term fixed income investors, I’m actually sorry to see this quick move. Considering some of the quality banks were issuing preferreds at under 5%, I have to wonder if someone is going to issue a 4.5% preferred now. Quality issues like PSA and PSB are still paying very, very low rates. Of course, this means that some of my other issues decent issues will be called and I’ll have to find a way to replace them. After inflation and taxes, there is not much left with the some of the new issues out there at the current rates.

    1. kaptain–I think that is why each of us has to make a prediction on rates. I am wondering if some ftf issues with longer call protection would be the way to go–not sure as I haven’t looked really–my belief is we don’t see much higher rates for years and years.

      1. Tim, I’m in your camp on the future of rates and have been pursuing FTFs as a healthy part of holdings. FTF holdings include INBKZ, INBKL, CHSCM, CKNQP, CBKPP, and AGM-C. On deck candidates include CHSCN and AGRIP.

        1. It’s nice to review the likes of INBKL and be reminded there’s language such as ” if three-month LIBOR is less than zero, three-month LIBOR will be deemed to be zero.” That gives it a floor of 4.85% coupon on the downside.

        2. Alpha, I went ahead and bought CHSCN today at $26.25 and going exD this month. Sold off all my SR-A. Didnt want to but geez I was getting $1.10-$1.40 more selling than I paid last week. Maybe we will meet again soon some time.
          I didnt realize my $19.90 HAWLI pre Fed purchase this morning would quickly become such a “yield grab”, ha.
          I even paid up for a few hundred more STAG-C at 25.90 (bought a big slug in 25.73 range last week. I will collect my $2.15 holding less than 13 months and take a blended apprx 80 cent taxable loss deduction on a probable call. If it doesnt happen this is a darn good preferred and will keep.

      2. Tim – I try to predict interest rates and every time there is a curveball thrown my way! Clearly, no one could have predicted this kind of action on January 1st. If rates stay too low for too long, it will actually push me over to stocks that I believe are undervalued and pay a strong dividend. Clearly, this is not my first choice as I would be happy with earning 7% from preferrreds.

    2. Kaptain, It doesnt take much imagination to predict a 4.5% or lower when dust settles. After all we got old perpetuals from the 1940s and 50s still trading with par yields as low as 3.5%. So 4.5% is definitely a possibility. Loved David Gladestone’s (LAND) comment. If I can sell a 3% preferred I will not issue any common stock. 🙂

      1. Grid – yes, I think we could easily see 4.5% in the next couple of months especially from a quality name. PSA-K with a 4.75% coupon finished today at almost $26 per share!

      2. Except the 5% issues fell Friday. After yesterday’s recovery they fell some today. If investors aren’t going to pay more for 5% they won’t buy the same thing for 4.5%.

        1. My uneducated guess is they are a bit spastic now as market is in turmoil and this is causing movement there also. I dont think one can get a definitive answer until market settles down and people start “looking for income” again….And then you got the big preferred funds that will buy also. And then one has the specter of redemptions for a lot of issues too. I think it will take a few weeks or months to determine.

          1. Depends on whether they’re just falling with the tide or they’re falling because of increased risk. If we’re headed for a wave of bankruptcies then higher risk needs to be priced in. Though that might not matter to the yield hungry investor.

            I may have money on the sidelines for awhile and I’m debating how much to put it into these “low risk’ issues.

            1. MartinG, Whether at 5% or 4.5% coupons, risk and fear are blowing the credit spreads wide open. Like you mentioned, if (when) a few defaults hit it should get interesting. The relative safety of higher IGs/ancient issues/even lower coupons I don’t think can be understated here.

              Considering increased call risk and market dislocations, I was quite happy to hide some capital in a higher IG 4.5% coupon today. 6 months ago it’d have been a non-starter.

            2. It just depends on what ones term of risk and yield chase is. There are many preferreds in basically no risk to bankruptcy. Some have 80 plus years of uninterrupted payments and IG status. But one replaces one type of risk for another type of risk up and down the yield risk spectrum; be it duration, credit, yield spread, etc., etc. And that isnt including market volatility either.

              1. So true. And the funny thing is the sort order and direction of those risks has changed repeatedly over the last 18 months. There just is no one right answer day after day. Since about Dec 2018 it’s been a game of risk whack-a-mole. Plenty of effort and vigilence from all of us, but it’s also provided outsized gains over that period.

                My instincts are saying time to drag out the storm shutters. Not the end of the world positioning, just enough to preserve capital. My plan is to remain in the higher IG, manage call risk and maintain credit spreads which includes keeping an eye on the underlying indexes. I’ll gladly give up 1% of yield to avoid a potential 10% loss of capital. Less concerned about duration as not seeing a catalyst anywhere for higher rates. Which of course means they’ll probably head north soon. lol.

  7. All those preferreds that we were chasing on friday now are no longer a good deal. I was trying to get WFC+X when it was down at $25.20 but never got a fill and now of course its way up again. Its now going to be next to impossible to find anything decent to buy unless you are willing to buy what I call “Crap”.

  8. From reading posts on other sites, this was going to happen from last week. That is why I was all in by end of day Friday. Lowering rates is bad for money market accounts, but is great for fixed investments as they will continue to climb and climb and climb. I just need to know when rates are going to rise so i can get out. That might be awhile since the world loves to reduce rates as the Fed is looking out for the stock market.

    When the economy is poor we lower rates. When the economy is fine, we lower rates. The goal is to get to Dow at 40,000 so that the haves can be rich.

  9. CCI-PA Preferred of a large cell tower owner jumped 42.00
    Lets face it, this rate cut isn’t going to help the economy as we are still in the early innings of this virus.
    All this is going to do is help the stock market ( supposedly )
    Now it makes me consider selling a few of the preferred I bought last week if they recover what they lost. Makes no sense to cut rates. Who is it going to benefit ?

  10. This cut seemed to spike up many of the preferreds I own, especially those below $25 and recently IPOed.

    Guess, this means the rate cut was not fully priced in?

    1. If you are a trader, yes.

      If you are more long term holder, you are a buy and hold. Rates just got lowered. In the coming weeks and months investors will look at their money market rates, and reach for yield, push up fixed investments longer. More loans will be given out. Those higher loan rates that businesses inquired about, just got cheaper, and allowing companies to not go bankrupt, keep payrolls going, investments in business got cheaper…

      I will continue to cycle into more illiquids as they didnt move at all much. I might have too much already :-).

  11. Hate this also. I expect this to boomerang on the stock market. Why? Jay Powell’s 11am news conference.

    Did he call business leaders to see if they were cutting back should be the operative question?

    If he says YES, then a 50 basis point emergency cut means businesses are cutting back rather sharply. Bad news for the markets.

    If he says NO, then he didn’t do his job.

    Jay Powell continues to be the most unqualified Fed chair since the 1970’s. Overstated? Not in my opinion. The Fed leader needs to be an economist not a business person.

    Let’s see what happens

  12. Great. There goes another bullet out of the already almost empty clip. Like I said last week – you count on the Fed as regular as rain, to do the wrong thing at the wrong time.

    Mr. Socialist wins big today and tomorrow we go down huge again. Who will remember the purpose of this cut? Very frustrating… The collective statement that ‘we stand ready’ by the world’s bankers was plenty enough to calm the rufled feathers yesterday.

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