The obvious answer to my question is that we have no idea–although I spend plenty of time pondering the question. Everyday I look for ‘bargains’ in the preferred stock and baby bond arena and I simply don’t find issues that I want to buy very badly—when interest rates move higher most of the time we are going to start losing capital so what is the point of buying when we have solid competing alternatives.
When we have rates at a relatively high rate and threatening to go higher we will have to do what we have done in the past–buy term preferreds and short dated baby bonds. This is the best solution to higher returns when starring at potential loss of capital because of high interest rates. By and large going this route fits my plan pretty well. This necessarily means that purchases of safe (but low coupon) longer dated baby bonds and of course perpetual preferreds have to be minimized (for the time being), which hurts my balanced approach, but with 5.3% CDs right now one can have the ‘safe’ investments in money markets or CDs and forego about 1/2% of coupon.
Right now I have the Hennessy Advisor 4.875% baby bond issue (HNNAZ) with a 2026 maturity on my list and have the prior mentioned good til cancelled order in for some shares. Today I will add an order to buy more 9I already have a position) of the Carlyle Credit Income Fund 8.75% term preferred (CCIA). Shares are now at $25.40–an ok price to buy right here—this is a monthly paying preferred.
This morning the 10 year treasury is at 4.39% which is lower from the close of 4.42% yesterday. Tomorrow and Thursday we have important inflation news with the CPI and PPI–will interest rates plunge or skyrocket after the release of the numbers? Who knows!! I stick to my thoughts that this coming fall (or winter) we will have long rates going higher–regardless of what the Fed does to the Fed Funds rate–there will be a moment in time when buyers of long debt ‘demand’ a higher payment from an insolvent government–seems logical to me as I demand a much higher reward from a junk company than from an investment grade company.
Couldn’t agree more August. I read somewhere that the amount of monetary debasement has averaged about 10% per year since 2009. Hasn’t all showed up in the inflation rate yet due to offsetting globalism & technology factors but debasement still the same. One reason gold has averaged about the same return over that period and stocks with avg 12% return, if you subtract out about 4% for annual earnings are left with the leveraged inflation of underlying assets of about 8%.
While I love the contractual returns of floating rate preferreds and other income issues, can’t help but wonder if, risk adjusted, I would just be better off buying gold and no tax man taking a cut of the returns which for many income issues are just keeping up with inflation!
You can see the gold performance at the bottom: % annual change
https://goldprice.org/
USD 7.3%
Euro 9.0%
No risk, no tax man
I have no problem trading between perpetuals. Sell one buy another if they both are lower priced then no harm no foul on the trade. If anything the rate volatility creates more such opportunities. Trading in and out is a different matter though I rarely sell for a loss because of rates I’ll just ride it out while collecting the dividends.
I am still looking for 4 cuts in 2024 short term, but long term trend in rates is up not down.
Personally I am of the view that interest rates move in cycles which last for about 1 generation: 30-40 years. For the remainder of my life long term rates are going up on a long term basis with bond bull markets dispersed within the long term bear trend. This is simply the history of global interest rates as documented in the (very boring) investing classic “A History of Interest Rates” which documents the 5,000 year history of global interest rate cycles in detail.
IMO the next long term peak will probably be 30 years from now and will probably be higher than the peak in the early 80s.
Inflation is the primary investing risk factor moving forward IMO, and I don’t believe the government statistics.
FWIW