T Rowe Price chief economist is out with a call for the benchmark treasury heading to 5%–darned near a point higher than where we are currently positioned. The 10 year yield is up 9 basis points this morning to 4.16% and this is getting a bit critical for income issue pricing.
This situation puts us in a bit of a bind–severe capital losses if it even gets close to 5%–and dropping rates on CDs and money markets. I model a 10-15% capital loss at 5%. Many folks are simply happy to ride out the storm and collect their dividends and interest payments—I am about total returns and capital losses are painful since I am not drawing any retirement accounts payments and still are focused on building accounts up.
The best position is short duration securities which will move much less than either perpetual preferreds or long dated baby bonds. Higher coupons are better than the low coupon, high quality issues for retention of capital.
I am surveying my holdings and will likely ‘rearrange’ the portfolio somewhat–the juicy capital gains will be retained to a fair degree.
I suppose this is a simple question and everyone’s answer is different but how much of a premium in yield do you expect for a preferred with a rating of BBB over, lets say, the 10 yr treasury, today?
10 yr – 4.2%
ICE BofA BBB US Corporate Index Effective Yield – 5.25%
preferred BBB – ???
What say you? 6.2% ? More? What is ideal to you? What would make you buy?
The after tax yield is important to think about. There is a tax benefit associated with qualified dividend income in taxable accounts that should be accounted for.
It all depends on your objective. Personally, I wouldn’t invest in a credit mutual fund/ETF at this stage as the risk isn’t worth the return for me. With that said, I would pick some individual bonds with only 1% spread, if I really like the name and willing to HTM.
Most of the US corporate pension plans use a AA corporate bond rate to determine the present value of it’s liabilities. Hence, if the plan is overfunded (and no significant active population) then low spreads can be an acceptable rate of return.
Just saw Paul Tudor Jones and I’m sure his lack of owning any long term bonds — or any bonds at all–will cause some people to reorganize their portfolios.
Just remember the stats I posted here: only 2% of US debt is longer than 10 years. Saying the fed can’t control the long end does not imply the fed cannot control the long end quite easily.
I missed the story and cant see the news release. And I like some of T Rowe’s info. Still/But…. Betting on markets based on one economist’s opinion is a fools game at best. I call these shock reports….Nazi Economists. Use to always be one. A Gary Shilling, Nouriel Roubini, you know predictions way outside the norm. WSJ use to list 30 economists and their predictions for next 6 and 12 months. GDP, inflations. the 30 year. And most would be within 1/2% of each other. But there was always 1 wayyyy outside the rest. The field was very accurate, sometimes for 3-4 years. Then, they’d be so wrong as to prove they know nothing, and they never have. And we were foolish for listening.
Will the 10 hit 5%? Thats not crazy, but would be very unexpected. Keep in mind we are heading into 2025 prediction territory. And SHOCK gets attention. Byron Wein ten surprises have been copied by many.
Nobody has called Claudia Sahm out for her outrageous ‘transitory inflation call mistake’…nor her Sahm rule prediction for recession. They’re good as long as they are right, when wrong….they get ignored forever there after
Liz Truss deja vu after the election?
My account NAV dropped about 1/2% today. It’s almost entirely preferreds of various flavors collected over the past couple years. The unrealized capital gain is still around 5% so I still have some cushion left, though the rising yields is a bit of a concern.
FC- The fed does not control the long end and the market forces can swing the T-Bonds any which way it likes. Eventually if a crises forces the fed rates to rock bottom, the T-bonds will settle lower. But this could take years.
The market had priced in all the cuts for the rest of the year so if the Fed doesn’t make even a shallow cut in November- not impossible given the economic numbers, I wouldn’t be surprised to see more pain. I secretly thought they did 0.5% cut so they wouldn’t have to do it in November so close to election.
I have truckfuls of preferreds that are slowly dipping red. I’m mostly in the hold and collect camp as I’m weary to too much churn.
I rather think they were making up for their failure to cut by 25 bps in July.
Well, what would you expect with these clowns running the show?
I wouldn’t be surprised to see 7% on the 10 year soon enough.
Dan,
Clowns is right. The Fed has been wrong 90% of the time since it’s existed. If these clowns actually had any idea of where rates should be, or could predict them, they wouldn’t be in the Fed, now would they? Instead, they’d be multi-billionaires from making rate bets for themselves. I’ve been watching the Fed for almost 50 years, and I’ve never been more convinced that it makes for more sense to anchor the money supply to the price of gold, and that Nixon f***** this country so bad by taking us off the gold standard. The supply of gold grows roughly 3% per year over the long term, close to the economy’s long term growth rate (at least until recently, when so many bad decisions by the “clowns” have probably brought us down into the low 2’s. ) I would much rather have something firm, predictable, non-manipulable, and growing at close to the economy’s natural growth rate than a bunch of self-important, self-anointed clowns constantly running from one side of the Titanic to the other, any day of the week! One hundred years of being wrong 90% of the time should be enough to prove it doesn’t work, n’est pas? Will humans ever learn that there are some things they just can’t do???
If the fed continues to cut the short term rate won’t that shift everything down a bit including the longer durations? I think the recent cut by the feds caused an over reaction and we see things normalizing to “reality”? I guess what I am saying is for the 10 year, over the next 12-24 months, we might just see “lower highs” as time goes on and things fluctuate.
At this stage my holdings all seem to be in different types. Fixed, float, defined maturity, etc.. some will go up, some down, and some stay the same with a leaning towards fixed perp. I am more a buy and hold type person
fc,
Long term rates do not necessarily have to go down when the fed cuts. Long term rates are a reflection of the market’s perception of future inflation and growth rates. The 10’s have been rising because bond investors are clearly worried about inflation coming back, and let’s not forget the ever expanding deficits that will require more bond supply.
I agree with Tim’s view and have recently trimmed a few positions where I had capital gains in lower rated issues. Not in panic mode and not expecting a rapid rise in rates but I’m not looking to add to perpetuals at current prices.
I agree with what you just stated but perhaps long term rates just went down too much when the fed did their first cut. Only natural to go back up some if it went too far in one direction. And now that it has gone back up some people now think everyone is worried which makes for a nice article topic.
So in April of 2024 we were super worried? Then less worried as the 10 yr rate dropped and now we are slightly more worried again? Or maybe going from a 10 yr rate of 4.6 to 3.6 in 5 months was a bit exaggerated and 4ish should have been more reasonable for the current env?
Just talking out loud here. I felt 3.6 for the 10 yr was kind of strange. An over reaction when the fed recently cut.
Long-term rates are also thought to reflect supply, and with Treasury leaning into bills, reduced supply could be part of the reason for lower 10- and 30-year yields than might be expected based on growth and inflation expectations.
5% on the 10 year? That’s a lot. Who knows? Several posters here, including me have made a case (in one way or another) for higher long yields. I’ve been raising cash for months so I’d be ready if it did happen.
Today, PFFA closed 1.3% off its very recent 30% rally high. I’d hardly call that a meaningful dip after the huge rally. Corrections happen. Anyway, I’m more interested in watching JNK for a clue. When PFFA made its higher high, JNK made a lower high. Spreads matter.
If your thinking is that rates for everything on the curve will go down as the Fed cuts rates, this ETF might be what you are looking for: Invesco Equal Weight 0-30 Year Treasury ETF GOVI
JMO. DYODD
Saw that headline too. While I wouldn’t be happy with the resulting capital losses, I do have plenty of MMFs and CDs coming due (or called) so would be able to do some buying if opportunities presented themselves.
Rocky –
You should get plenty of buying opportunities.
Many perpetuals have just rallied too much. One example – as of this morning you had ADC-A at a 4.89% yield, as compared to a 4.18% yield on the 10-Year Treasury. Way overpriced.
Papa Doc, just a confirmation of your point: I sold my ADC-A on Friday and Monday at under 5% yield and bought the senior ADC 5.625% 2034 bonds with a YTM of 5.1%.