Hard Not To Like These Gains

Looking over accounts today it is difficult to not like the nice gains I have today—I don’t necessarily understand the market movement from a common sense perspective, but just the same I will take the gains.

In spite of the gains there are still plenty of baby bonds and preferred stocks falling today–some of them kind of hard–with fixed-to-floating rate issues acting a bit dicey.

One loser today is the Customers Bancorp Fixed to Floating rate 7% preferred (CUBI-C). This issue is off more than 3% to $22.33. Prior to the pandemic this issue was trading up near $26–way too high. The issue enters the ‘floating’ period on 6/15/2020—less than a month away. The issue will float at 3 month Libor (now .42%) plus a spread of 5.30% so today that would equate to 5.72%—1.28% below the current coupon–something has to give and in this case it is the price.

It is pretty likely that we are going to see quite a few of the fixed-to-floating rate issues remain outstanding in the future—unless we get some really spiking interest rates coupons will be heading lower.

BE CAREFUL–pricing on fixed to floating rate issues will react negatively to a lower reset in the coupon 2-4 quarters prior to the new reset occurring.

We would suggest double checking any fixed to floating rate preferreds you are holding. Our fixed-to-floating rate page shows the 1st call dates (which is also when rates begin to float) as well of the ‘potential coupon’. A large share of these issue would reset from 1-2% lower in coupon if they reset today.

Many of these fixed-to-floating rate issues have some time before they go to quarterly resets so everyone should make sure where their issue stands at least 1 year prior to the first coupon reset and then apply your best prediction to where interest rates might be at reset time so you can exit if necessary.

16 thoughts on “Hard Not To Like These Gains”

  1. With LIBOR at 0.3% there isn’t a lot more damage that can be done to FtF issues that are already floating. If you like the yield they are giving you at current prices you aren’t likely to be terribly hurt due to interest rates falling in the future, and if inflation ticks up from all the stimulus then you have a hedge against your fixed rate issues.

  2. I don’t like these gains. That was easy. Don’t know how to play a market I don’t understand.

  3. Today’s fixed to float dog could be tomorrow’s golden interest rate hedge. While rising rates don’t seem to be likely for a couple of years, longer term inflation cannot be dismissed with the trillions in $ being printed. I don’t mind mixing in some fixed rate with floating rate, at least those that convert several years from now.

    1. Indeed, monetary regulators around the world will very soon be faced with the need to absorb the excess money supply, which they are generously injecting today.

    2. Agree with this Larry. Some of the best gains come from the unexpected reversals. Not making any predictions but staying diversified with preferred holdings, because I know nothing about what will occur tomorrow, and less than nothing about what will occur a year or more from now.

  4. My portfolio now back to within 3% of break even on the year but now with about 6x more divvy earning power. Most of my preferreds that crashed are back from the dead and I have added blue chip divvy aristocrat commons. Retirement in 3 years and things are setting up nicely.

    1. Yazzer,
      I think a mix of preferred and dividend paying common might be good. I am back to even on RTX as of today and getting about 3-1/2%, but I found I did a bad time to buy in right before 1st qtr. report. Even thought Raytheon and United technology have long history as separate companies, As a combined company its a new ball game so I should of waited until after the report. If you had bought last week right after the release of the report you would have a 4% dividend and 4.00 a share in profit.
      :Plus you would be in one of few billion dollar in sales defense tech companies under 100.00 in share price.

      1. Charles M.
        Indeed, plus, I will sell covered calls from time-to-time to enhance income – this has worked well over the previous 6-8 weeks since volatility has pumped option premiums in the big downdraft. But the juice is slowly being sucked out of those premiums the past week as volatility has sunk back down.

  5. I looked at the bank but the ratio of preferred to common equity seems way too high. There’s not much cushion on the balance sheet nor in common dividends to provide much preference for the preferred. In general when an issuer has four or five issues of preferred, are they of equal seniority or preference? Is there senior or subordinated preferred?

  6. Chuck – if you didn’t make money today you have a very odd portfolio, or maybe you follow HDO!

    For anyone not steeped in FDA terminology a Phase I trial is SAFETY ONLY. Formally, it’s only purpose is to ensure it doesn’t kill too many people. (The Phase 0 trial – there being no such term actually – is doing the same thing to hundreds to thousands of various animal species, often at very high doses. But we won’t go there.)

    In truth, the clever pharama companies will design the Phase I to give at least a hint at efficacy. But it’s a rare Phase I trial that actually gives useful efficacy data. Not enough patients to “power” the study and the recipients don’t have the disease. They are “healthy”.

    PS – if the entire COVID response were up to the FDA and the Dr. Faucis of the world we would still be waiting on the peer-reviewed articles to appear before even considering approval of human clinical trials. All these trials got done because the present administration beat the bureaucracy with a stick to get them to do what doesn’t come naturally to them.

    1. Back in the late 80’s and early 90’s I had the opportunity to invest along side my firm’s venture capital arm on all the issues they invested in. They had their share of bio startup firms that went through all the Phase 1-3 testing protocol on their little magic pills of the future. I found out the hard way succeeding in Phase 1 means very little… I hate to remember how many of them ended up bombing out completely… Fortunately those failures were offset by an ability to buy GILD at the venture capital level and also Sandisk among other homeruns…..

    2. This trial was 45 people and 3 had notable side effects, based on what I read.

    3. lf vaccine development was easy we should have a vaccine for HIV and the common cold by now. There is a good reason for the prolonged tesing of new drugs and vaccines. most if not all drugs and vaccines have side effects, some deadly. The history of drug development is littered with perhaps housands of failed potenial drugs that had exciting phase 1 results only to be abandoned as the number of people tesed increases revealing lack of efficacy or unaccepable side effects in real life tesing. This company (Moderna) has had is own share of failures using this particular technology. I really hope the various vaccine trials do succeed but today’s euphoria seems excessive to me and to anyone else who’s ever done experiments. We should know more by next fall but I have enough concern about Moderna’s technology that I would decline their vaccine (I’m no anti-vaxxer by any means) until it has been thoroughly tested.

  7. Tim – I would double down on your comments re: the fixed-to-float issues. Be sure you are calculating yield at both present coupon and reset coupon as many will drop quite a bit. Personally, I traded out of most of my F2F exposure several months back. In most cases I just swapped to a same-issuer non-F2F issue. Or at least one with a lower float down.

    The market isn’t liking CUBI. All 4 of their traded preferred are F2F but the “E” and “F” issues will drop less. That is where my (small) CUBI exposure lies.

    Also, CUBI is a “lunch bucket’ kind of bank and the COVID thing has hurt the “working man” harder than others, and CUBI has suffered as a result. The Foo-foo banks, like FRC and STT and NTRS, have all done much better. Not very long ago the CUBIs were all in the 27$ range but no more.

    1. Bob – Why do you say that about E and F? Because of those two having the longest time before they float?

  8. If you didn’t make alot of money today then you definitely are doing something wrong. LOL The Moderna CEO gets on CNBC at around 6:30 this morning (yes I did watch the interview) and explained the process. He said they are only in Phase 1 with 2 more phases to go but he said it looks very good. And Kabang the market has its hair on fire and goes crazy!!!!!! LOL I have a couple of Utilities that Affinity gave me and I would love to buy them but they are quickly getting away from me. Looks like the days of getting high quality stuff under par are over.

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