Interest Rate Increases Take a Pause

Yesterday I had just written about the 10 year treasury yield hitting the 1.18% level when rates began to move off the high, which was up 5 basis points from the previous close. The yield ended the day at about 1.14%.

Today the high was 1.13% with a close at 1.09%.

With solid treasury auctions the last couple of days investors were heartened – for the moment.

This was truly ‘the pause that refreshes’–but in my personal opinion it is just a ‘pause’. But we all like a pause in higher rates and a bounce in prices–it gives a folks a chance to re-evaluate their holdings.

Below I give a couple of examples of the difference in movements in high quality, low coupon issues and low quality, high coupon issues.

Here you can see how sensitive a high quality–low coupon issue is to interest rate movements. Tumbling hard the last 5 days as rates rose, while bouncing nicely on the respite since yesterday afternoon from higher rates. This one is the Public Storage (PSA) A3 rated 4.625% perpetual preferreds.

On the other had below you can see what has been happening with a high coupon, junkier issue from Arbor Realty (ABR) 8.25% perpetual preferred. You can see the issue has been moving in a 25 cent range for the last week.

Of course other factors are to blame for movements up and down–potential redemption dates for instance. BUT newer investors need to know that the above charts are typical of price movements when interest rates rise. When rates rise investors demand higher yields–it is that simple. Low coupons are sold–high coupons are held.

11 thoughts on “Interest Rate Increases Take a Pause”

  1. I have no comment on those, we will see. There’s a growing consensus that rates will go up followed by inflation. Someone told me it was inevitable. I HAD to laugh. Just like all those fed dot plots from 2014 thru 2019? What about disinflation or deflation forces? And if rates are going up what happens on the other side, do we revert to low rates again?

    I see barrons is trotting out the normal suspects against. Reading between the lines has been hysterical for past 5 years. Now the charade has been dropped. Did you know low unemployment was bad for America? Evidently abbey joseph cohen has the nerve to say so. Plus give up to China…..It’s absolutely pathetic. I wish I could cite her past 10 years of predictions ….. Basically most all wrong. And they still pretend there’s something to be learned listening to her.

    1. IYP, I have consistently stayed lower longer. If you look at the past 40 yr trend trough to peak in “each cycle”, the unbroken trend of lower rates is still very much intact for now.
      This doesnt mean one shouldnt be aware as mini trends can be played and capital gained even while staying invested in preferreds. I continue to stay 100% invested tweaking the buys that provide more backside protection where I can, while waiting for dropsand repurchases in other issues.
      As Larry Swedroe said, “Ignore the experts” as they know nothing. Where is that 6% 10 year Gundlach was crowing about in 2018?

      1. Very true about Gundlach. He may know everything there is to know about bonds but he is a terrible forecaster. It’s almost to the point that I treat him as one of my negative indicators (if he says up I think down). Like Cramer on CNBC. Cramer loses more money for his audience than even the HDO crowd next door,

        1. He’s just one of many. I have an interview of his I keep on my desk. NOW IS THE TIME TO GET DEFENSIVE ON BONDS. Circa 2016.

          He wasn’t the only one from bill gross to zandi and all in between, including the fed, ultra short was the only place to be. Maybe the only one long the whole way down from 1981? A Gary Shilling. He’s still long Treasuries. I think he said he did 6X better than S+P.

          The whole way down I’ve gone long with high coupon. I would have done better with Par much less discount paper but i like to sleep at night. I’d rather get a 3.5 YTC with a 6 coupon. Then a par bond at 4.0-4.5

    2. IYP, ALL of our very best acquisitions over the years, be it in financials or real estate, have been during times when most everyone was upset with the markets or during “expert” predictions of doom which marginalized otherwise excellent assets.

      1. Good point. The WSJ use to annually list a score of economists’ forecast for the coming year. ….GDP, employment, interest rates, etc. The majority were normally in consensus with a few outliers. And often times they were correct. But when they were wrong they didn’t even hit the side of the barn…..and it cost you a great deal if you had followed the herd.

        Grant’s interest rate observer made a return to barrons and his comment regarding % rate predictions? “If you want to make a prediction make sure to do so in the shower with the water running!”

  2. Tim, ABR-A has been the quintessential flipper for me, especially this year. Buy after exD in 25.20s and 30s, flip pre exD around $26; pray for no call, rinse and repeat. And I have been holding my oversized stuffed position bought again at those lower prices and playing the game, yet again as it keeps creeping up.
    The part you didnt add is the “free bee” bps price backstopping that A has thanks to ABR-B. A very unique situation in that all 3 ABR preferreds are now callable, but the 7.75% typically trades around same price as the 8.25% A price does (though past few weeks it has climbed above B just a bit, but yield is still significantly higher).
    So in this situation the market is going to support A better since you got some bps in hand. ABR was one of only 2 Mreits that actually raised their common divi after March collapse when Mreits got hit hard, and many suspended payments and cut common divi hard. So in this arena for me its a good sand box to play with the trash on a relative basis.
    Granted I liked the old ABR baby bond ABRN more back in the day, but it is long gone and aint coming back.

    1. Grid, I don’t know about 100% invested but I think your correct on the money to be made with short term flips. There are a few short term plays for “safe” money while waiting for them to be called.

      1. Charles, that is certainly a personal thing about investing limits. I just go full bore and adjust on the fly as sitiation warrants. Ala, sell something and load up on for example the CNIGP after merger announcement and PW-A when it dipped near $25. Tomorrow is another day and adapt and move on to it, lol.
        But I am a pensioner and live entirely off that. I invest for income I never spend. Not exactly typical or logical for most retirees. But for me trying to time in and out on cash wouldnt work. I would never hit correct entry and exit timings.

  3. Tim, I believe you are correct that this is only a pause.

    Once Uncle Sam whips out his credit card the interest on US debt could sneak higher, I suspect around spring time. It will be interesting to watch as it will be market driven and not something the Fed allows to happen. Inflation may come next year as people rush to concerts/sport events/ dinning out. This may finally drive M2 higher.

    Holding dry powder for the higher quality lower coupon issues to drop for long term holds.
    If anyone knows how to invest in the company that produces the green ink sold the federal reserve, please let me know.

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