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Higher for Longer?

Who knows where interest rates are going? It has been soundly proven that the answer to this question is NO ONE. Now as I watch my early morning CNBC allotment (I only watch from 4 a.m. until 8 a.m CDT) I see a new theory is popping up–we can grow the economy just fine with rates in the current area–or maybe just slightly lower. I think we have all noted that the amount of ‘dry powder’ available to be spent is massive–money markets, CDs and treasuries–by spending I mean spending on goods and services and/or investing in the equity markets. When/if interest rates move lower will the ‘dry powder’ move to equities–or will folks simply spend the money on goods and services? As I said no one knows where rates are going or what will happen to the economy—the same ‘smart people’ who entered the year predicting 6 rate cuts are now saying maybe 2—these people make millions of dollars a year ‘throwing darts’, but have no clue.

Anyway inflation numbers came in hot yesterday and as I expected markets moved–of course instead of tumbling the equity markets zoomed higher–all news is good news I guess. Interest rates initially held flat after the announced inflation before moving higher–closing around 4.16% (the 10 year). This move was mild–really making little difference in share prices of preferreds and baby bonds. Of course we have to do the whole ‘routine’ again tomorrow with the release of the producer price index (PPI) and retail sales numbers.

Yesterday I did nothing in the markets, but expect to do some buying today and/or tomorrow. As all of us know it has been ‘forever’ since we could get a 5% CD–and I am really loving it. To do some due diligence in preparation to make equity buys takes a bit of effort–hell it is easy to do a couple clicks and buy a 5% CD. I am loving the ability to put together a truly diversified income portfolio with some laddered CDs, some high yield baby bonds (i.e. BDCs) and some super safe CEF preferreds—I don’t remember a time this century that presented such an opportunity. Maybe I am getting too complacent.

Today we have no scheduled economic news of consequence. Interest rates are flat around 4.16-4.17% (the 10 year) and of course equity futures are up a bit, although not much. Maybe a super quiet day? We’ll see soon!

25 thoughts on “Higher for Longer?”

    1. Can you imagine what the tax-free money funds were paying??? I’m too lazy to look that up, but even if it was 7% or 8%, that would have been amazing.

  1. It’s also roll over CD time for the pig pile portfolio. Strangely I haven’t had any CDs called yet, but have been methodically rolling into new CDs as others mature. I remember my grandfather putting me on his knee at the campfire telling me stories of double digit CDs. I thought, how boring. Now…..CD’s exciting as all get out at half those halcyon day rates.

    1. Pig, I havent had one called, as most are noncallables….But the surest bet we can make is our juicy 5.8% 2028 CD will be toast come Oct. when it becomes callable.

    2. The highest CD I can remember selling was 13.75% for 1 year.

      Some of the most lucrative were 5 years at 12% with a 3 mo WD penalty. “If you get out in 1 year you net 9″….Made it an easy sale. After the fact we discovered NO BODY wanted to tell the board they were paying a penalty. So they all stuck!!

  2. Just got two, JP Morgan 1 year CD’s (5.7%) called in my Schwab account. No big deal really. I can roll into a 3 month treasury bill @ 5.4% with no state income taxes due…..just about even money. Between Muni’s & Treasuries, I’m avoiding a big state tax bill on my interest. Really pays to consider….. Treasuries vs. CD’s as CD’s have Federal & State bills associated with them…..not what you make….what you keep!

  3. All I want for Christmas is 6.5-6.8% fixed BBB QDI rated utilities issues with a large potential capital gain.

    Is it so much of an ask?

    1. micahc, did you put that on last years Christmas wish list? They were available last fall in 6.5%-7% range. Did you get any of those wrapped presents under the tree last year?

        1. Dick, I sure was getting them, but I can still relate to your comment though. For over 10 years I said if longer duration CDs ever get over 5% I am going to buy me a slug. And then about a year and a half ago or so, they did briefly. But I froze and got greedy and blew it as they quickly receded. I got that second chase during bank crisis and didnt hesitate then. But I shouldnt have needed that second chance to get what I had waited years to get.

          1. I couldn’t believe how some of the old utility preferreds had ask prices yielding 6.5%+ and no one would buy them. I bought a lot but tried to stick to responsible portfolio limits.

            Then I got a little irresponsible when CTA-B was getting dumped recently LOL. Of course, I try to stay somewhat balanced with variable rate issues too.

            1. One did not even have to worry about sector when they “all” reached 6.5%+ or approx that for ridiculously good quality. Anything high grade went right back up. PSA-x, GDV-x, EAI, NRUC, PRH/PRS, etc..

              All one had to do was sort > BBB+ and go wild buying when they all dipped hard. I was thinking, WOW, finally I can buy quality for a lot cheaper then I ever expected. The yield was not especially critical at that time. Sure almost everything was > 6% but I was thinking more about the A rating. So I was like I will take 500 of this, 500 of that, and before I knew it I had spent quite a lot on A rated material. Thing is, unlike alpha I think, I held onto everything I bought. I really do not sell very often.

              I was spoiled for the last several months. Now I am in boring mode and just bought SGOV. I just have to say that moment in time I really did wonders for my overall IG rating for the portfolio. It really helped get some sock drawer stuff. I dont even worry about such things as EAI or PSA for example.

              With that said I sure do seem to have an alphabet soup mix of ill utilities. I bought whatever ones yielded the most at that moment in time. I cannot even remember what they yield at par most of the time with all the convoluted names.

              The one thing I never got around to buying was TY-. I bought a single share to track the price at 45 but it never seems to really tank when I am ready.

              1. fc, Great pfds! I’m sure we’ve been together at the buy window on each of those. Like you, buying hard and relentlessly into the heavy dips and have done this repeatedly scoring 6.5% on A-paper – like Dick said – when no one else will buy, except apparently Dick, you, I and a few others I’m sure.

                Years back, like you I would only accumulate – and sell nothing. Was a bit dug-in on that. I rode them up and down through multiple standard deviation busting “events” watching cap gains accumulate and evaporate while I was happily focused on steadily increasing income.

                The problem for all of us is if we sell at the top – how to replace the income without just pushing nickels? And that’s the secret sauce – having developed an alternative with similar IG-level, lower volatility and slightly superior yield.

                I buy preferreds for income and not cap gains. The cap gains can be fickle. So when out-sized gains are laying there, I’m converting them to income. I think of it like this: if you have a rental property and your tenant indicates they’d like to offer 3-4 years on rent in advance if you sell the property…well that’s an easy decision – at that point the YOC loses relevance. Even if one has not developed their own secret sauce alternative they still have 3-4 years to re-invest just to break even. Worst case scenario, what are the chances the price for the issue, or something similar isn’t lower in the next 3-4 years?

                Like you, focused on A-paper, steadily rising income, no rate predictions, no news cycle, and no nonsense. A big overlay for me is the math, credit spreads and relative value. The math works: On track for another >10% year, currently closer to 14-15% – but year is early so could go either way, though looks to be tracking higher. Monthly income is up every month for nearly 5 years now. And yes – currently selling about 3K shares/wk since Q4 23, most with 3-4 year divvy gains and will continue as long as market continues to buy at these prices – such as the ~1,000 shares of NTRSO a few days ago sold at a yield of 4.92% (who bought that!?). For me it’s all about the math overlay, rote decisions and staying 100% out of the prediction business.

                Best wishes and see you at the buy-counter in the next down-cycle.

            2. Morning Dick – is NMKCP in the same (gotta own) catergory as your CTA-B? I’m a bit surprised it hasn’t had more buyers here but I think its otc status is part of the reason.


              1. That is a relative statement since most illiquid quality issues lie on OTC. I picked up a 100 more of it at 63.75 this week, but all in all its not materially different than any other illiquid utes if one has a few ounces of patience. Even allowing for stripping out its upcoming exD the yield on it was less a bit less than what I just paid for with CNTHO and CNTHN within past week. Remember the float sizes are incomparable too. CTA-B is around 10X the float size that NMKCP has also. …I own CTA-B also still.

              2. BTW, I am not suggesting anything is a great buy now. But I will trade in and out among the similair sisters to squeeze out more juice. But overall, I am still relatively low in terms of percentage of perp preferreds. Im trying to get to 25% but am not there yet. Dont feel any since of urgency either.

        2. Dick, Exactly!

          Christmas comes when everyone’s balances are dropping, you keep buying all the way to the bottom and everyone thinks you’re nuts.

          Christmas comes again when everyone’s balances are rising, you keep selling all the way to the top and everyone thinks you’re nuts.

    1. Craig – Schwab shows about a dozen non callable one year CDs with an APY of 5% or better. There are a few non callable 18 and 24 month CDs in the 4.90+ area.

  4. I’m happily supprised about your positive outlook that now’s the time to build up a diversified portfolio with Prefs, bonds and CEF’s all close to 52-week highs. Looking forward to see your buys!

    1. Hugg89–my positive outlook is bolstered by all the nice interest payments on the CDs–with a nice blend in the portfolio I am hopeful for this year.

  5. Paraphrase from Mizuho guy on Bloomberg yesterday:’the Fed is looking for an excuse to lower rates but the economy doesn’t allow it.’

    A third priority for the Fed’s policy: lower rates are better than higher rates (the election or the deficit or both?).

  6. Thats not new. Nor are the attempts to tell us they don’t know, then proceeding to tell us their prediction!

    Grants Interest Rate Observer…“If you want to predict interest rates, do so in the shower when no ones listening”

    1. If you Prefer,

      The thought of singing my interest rate projections in the shower brought a smile to my face.

      Thanks for sharing.

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