Yesterday as I had mentioned previously I did a little buying.
I added to 2 issues of mREIT preferreds which were already in the portfolio. These purchases were made mindful of the underweight allocation I had to this sector of the preferred marketplace and how overweight I was to both closed end fund (CEF) issues as well as insurance issues.
I added shares of the Annally Capital (NLY-F) at $25.38. This is now a floating rate issue with a current yield in the area of 10.3%.
I also added shares of the Rithm Capital (RITH-B) @ $25.15. This is a newly floating rate issue and has a current yield in the 11% area.
Both issues are now redeemable, but I will ride them for as long as possible and deal with the ‘reinvestment risk’ when that time arrives.
This purchase brings a tiny bit more balance into the portfolio. I have updated the ‘laundry list’ of holdings.
A very attractive value is EFC-B. You give up a little current yield for 3 pts of appreciation when it resets in 2+ years. Also, for anyone holding EFC-C the B’s are $2.5+ cheap.
KMPB has very similar structure to EFCprB… FWIW
Tim – I keep asking without receiving any direction – will the Like button be returned to its past unlimited status or is it going to remain as is where Likes from older comments are removed from viewability?
holding NLYpF and NLYpG both floaters and RITMpA and RITMpB
the RITMs both started floating 8/15/24
I bought some more Regions Financial B with a floating rate of 8.9% at a slight discount at $24.97. The spread of 3.5% is thin compared to some but I like the tiny discount.
It was called, so there will be no floating rate period.
thanks
Thats funny I just added to my position in NLY-G today before reading this. Bought a little RITM-B to follow along Tim. I like high coupon floaters with no duration risk to boot!
Here is my question and concern about floating rate issues. Simply the rate can drop precipitously. See e.g. SOFR https://innovativeincomeinvestor.com/i-bought-some-preferreds-yesterday/
Obviously too, if rate drops so will its market price, so cannot simply sell after the fact and reinvest unscathed. But respect your opinion, or others, and curious as to feedback. Thanks.
if rates drop then fixed income drops too and floaters are still paying more than fixed income. The price might not drop as much as you fear, they’re already priced for some drop but nobody knows how much they’ll drop. I have a mix of fixed rate preferreds and floaters because I’m not good at predicting the future, though I have shifted a modest amount from float to fixed.
> Obviously too, if rate drops so will its market price
This is not so obvious. If SOFR drops half a percent, I am not sure that a preferred floater tied to that rate will see its price drop by much, if at all.
In fact if, hypothetically, SOFR dropped down to 0, I would expect floaters to *appreciate*.
This is such an interesting question – what will happen to the price of currently floating F/F rate issues while rates are falling not rising…. Just today, I happened to notice the announcement on the declared div for USB-A which is currently floating at SOFR +.26+1.02.. “A regular quarterly dividend of $1,682.317 per share (equivalent to $16.823170 per depositary share) on the Series A Non-Cumulative Perpetual Preferred Stock of U.S. Bancorp, payable October 15, 2024, to stockholders of record at the close of business on September 30, 2024.” That says that the coupon to be paid represents a 6.729% coupon. At present price of 855.90 that gives them a current yield of 7.86%… USB’s highest coupon fixed rate perpetual has a 5.50% coupon [USB-P], is currently callable and it’s TRADING AT A PREMIUM. So that means that the holder of USB-A is being paid over 225 basis points premium to hold the F/F issue vs what Mr. Market says a Baa1/BBB+ current coupon USB preferred is supposed to pay… Pretty impressive advantage for someone who has the same call risk as USB-P has…. Going back to USB-A, its last coupon’s rate was set in July so in round numbers let’s say SOFR has moved down 40 basis since then and will refloat next coupon at 6.329% from 6.729%. That would mean that at current price of 855.90, the new coupon will provide a 7.39% current yield…. Is that any reason for the price to go down when the premium income one is receiving remains 189 basis above today’s USB fixed rate par issue? I don’t think so.
To me this same math implies to me that the “pinned to par” type F/F currently floating issues will not lose much of any of their current prices just because the floater provides less income than it had. The advantage over what will be the present current income available for the fixed rate comparative will remain wide because the fixed rate current will come down too. So the question then becomes to the F/F rate shareholder is it worth it to you to give up the possibility of any price appreciation on what you own in exchange for continuing with a premium rate of current yield even if that yield comes down? And that’s where everyone’s different and the answer to the question does not have an absolute right answer that will apply to everyone……
Did I lose you as I rambled on? ha. BTW, I’m not selling my F/F positions..
Let me add that issues like USB-A also have a default rate that sets a minimum payment, in this case 3.5% at par, regardless of SOFR.
So, I think that one must resist the urge to evaluate floaters as a group, and know the specific terms of each issue before making a buy or sell decision.
No the issues won’t drop by the full amount of the rate drops because nearly everything else drops too including fixed income. Also they pay a high rate because of default risk, if rate drops lower default risk there may be a correctiom there too. But no guarantees, a struggling economy may increase default risk. Too many factors to make hard and fast rules.
I pasted the wrong link evidently. I will paste instead the Libor too for longer history. https://www.macrotrends.net/1433/historical-libor-rates-chart
So the explanation in favor of purchase of the floater is the higher current rate, and if the rate (e.g. SOFR) plummets the market price of the preferred will not be significantly impacted because all else will be offering less yield too. Ok get it but will defer purchase. We are in a declining rate environment and it can plummet. But will watch and keep open mind. Here is link https://www.newyorkfed.org/markets/reference-rates/sofr
which includes SOFR rates which shows can go e.g from 2 to about 0 within months. or quicker. Rather imo entertain floaters in stable rate or increasing rate environment. But I may be wrong, what do I know?
I think a major consideration for floating rate securities is the premium paid over the base rate. When all rates decline, the premium becomes a larger percentage of the rate paid, making the securities with larger premiums more attractive than they were before, all else being equal.
I dunno. Seems to me would rather buy an inverse floater in a falling rate environment than a floater.
We should all agree that being in regular non floating bond fund while rates rising not a good idea.
Hopefully most can also agree, being in a floater bond fund, or bond that floats, in a rising rate environment may be prudent.
So now in a falling rate environment, the converse setting, being in a preferred that floats or resets, and therefore may yield much less in future than at present may not be a good idea. But will watch some of these over time. However if SOFR/LIBOR precipitously drops, as has in past and may now again, just would not wish to be in these. But good luck to all.
Just my opinion. maybe am missing something.
Good choices for dividends, not so much for growth the prices may be topped out. I own a large amount of RITM-B and D, recently sold NLY-F above par though doesn’t look like a call is in the cards.
Tim,
The first 4 letters of the RITHM pfds are RITM, not RITH.
RITM-A, RITM-B, RITM-C and RITM-D.
QOL:
Rithm Capital Corp., 7.125% Ser B Fixed/Float Cumul Red Prfrd Stock
Ticker Symbol: RITM-B CUSIP: 64828T409 Exchange: NYSE
I think the RITM-D is the most attractive with a yield to call of 9.7% and a fat spread over the five year T. For this credit, falling rates will lead to falling mortgage rates which will eventually result in pre-payments and shorter servicing contracts which for Rithm may cause significant write-off’s?
Potter, I agree, and I own the RITM-D. I think the 5-year T-bill will remain ~200 basis points above the Fed Rate ONCE the spreads adjust. RITM may/probably will change from LIBOR to SOFR when the call dates arrive on the A, B, &C’s. Regardless they will track the Fed Rate. I think the earlier call dates are what’s attracting people to the A, B, & C’s. Even now the D looks more attractive to me. Time will tell.