Yesterday with the hotter than expected inflation numbers we saw interest rates spike up by about 15 basis points.–all the way up to 4.31%. I thought a pop was a possibility, but I was thinking mid 4.20’s%. We have been in a range of 3.8% to 4.2% for a while — so now the question is will rates go even higher? Of course I have no earthly idea–nor does anyone else, but I am assuming that inflation will remain under control and through the next 6 months rates will drift back down to 4%.
It has been a while since we have seen preferreds and baby bonds get spanked like we did yesterday—it was not a total wipe out, but it was meaningful as our accounts took modest losses.
It is times like these that one should be looking out there and seeing if there are some ‘bargains’—of course the term bargain is in the eyes of the beholder, but to me if something is down 2-4% a bargain may be present. In my case I was looking at the insurance issues (not banking issues) which were solidly red yesterday–some with losses of 3-4%. 1 issue losing over 3% was the Brighthouse Financial 6.6% perpetual (BHFAP) which I own and since the selloff pushed the price down to $23.82–off 78 cents the issue approached my 7% target I bought another chunk of the shares. Of course there were many other issues that could have been bought. Can prices fall further–of course they can, but if the fundamentals remain acceptable a little more buying might be in order. I will update my laundry list of holdings.
I will note that another of our holdings has gotten pushed lower in the last week—assuming it trades flat today I will be a buyer—I will post more on this issue later today.
This morning interest rates are flat at 4.30% on the 10 year—equities are up modestly. There is no scheduled economic news today, but there are a few Fed yakkers–although the yakkers at this point probably can’t move markets too much given that the ‘higher for longer’ message is firmly in place.
Tomorrow we have bunches of economic news being released and then Friday we have the producer price index (PPI) for January being released, so we will see if 4.31% or so is the high yield for the moment.
If you like BHFAP in mid-$23s with yield approaching 7% why not consider BHFAM in addition?
BHFAM is a low 4.625% coupon but at current $16-ish does yield over 7.2% already. Not callable till Dec 2026…
mSquare–might have to consider that – just added to an already current position.
thanks for the heads up m
Interestingly, I had the same idea this AM. So am trying a little experiment: bought some BHFAM @$16.12 (7.2%) AND some BHFAP @23.88 (6.9%); thus, shortest call & longest call/lowest coupon & HIGHER coupon. Will be interested HOW their price movements compare.
Jane S
https://www.enbridge.com/investment-center/stock-and-dividend-information/preferred-hybrid-shares
Bought some MFAN and MITN
I have been shifting away from FF’s to fixed for two months. Now I am less sanguine of the inevitability of cuts within the first two quarters. With fewer cuts early, a couple of issues that reset in the Summer look more attractive ( like Synovus E which I own). For me, rates in the first three quarters will be a struggle between the rate of supercore service inflation (see Auther’s latest on Bloomberg) and the Fed’s third priority which is to prefer lower rates. This third priority is somewhat new and can be mistaken for political influence in the rate making process. Does anyone disagree that if inflation is tamed but there is no serious downturn that the Fed will be willing to lower rates anyway? Without partisanship, it could be argued that lower mortgage rates and less interest on the debt would be positive?
what everyone’s favorite issues that reset this spring/summer that are not regional banks? i am looking for some new ideas with matured
thanks Z
AQNB starts to float at the decent spread of 4.01% which is not the same as a reset. It dipped to a discount yesterday but now is hovering at $25.
Don’t you think they will call it though? NI-B was called even though it had a lower spread.
I loved Ni-B but it was a much better credit. If the Fed has only cut once by the floating date, Algonquin may wait for a couple more cuts. As long as I buy at a discount, I come out all right. Most good quality is fully priced and only the mediocre is attractive on a risk adjusted basis? So weak utilities,regional banks, REIT’s and converts?
Z
I suggest that you ponder your expectations for the forthcoming year re economic scenarios:
1) 2023 was dominated by concerns that increasing interest rates would cause a recession.
It didn’t and the S&P rose inexorably on the wall of worry.
2) 2024 start has been dominated by surety that continued economic growth was assured and that the Fed would cut rates throughout the year. Until yesterday.
Do you expect:
Economic growth to continue, in 2024 as it did in 2023? We are in the year before election – in the past always a time of governmental stimulus to juice growth.
If so, equities, high yielders and BDC’s are your best bets.
Or is growth already priced in the markets, valuations at peaks?
If so, the strongest economic candidates having lower coupons/valuations are your best bets. Recently, ADM and CTA-B offered opportunities in this regard.
What do you expect the Fed to do? Slowly cut? Nothing? Increase?
That expectation will drive your FF or Fixed and short term vs perpetual decisions
Worried about CRE or comfortable that its problems are reflected in current pricing? Regional banks and REITs offer of great risk/opportunity.
Not sure about any of the above?
Then you could follow my personal stratgy..
Decide in advance what allocation in your portfolio is appropriate between risk and “no risk” (CD’s and TBills). Ladder your “no risk”
For the risk portion , start with the strongest cash flowing companies, preferring investment grade where possible.
I think it is fair to expect a 2024 portfolio yield of 5.5% to 6% if you limited yourself to the two categories above.
Many of the more experienced participants in this site are seeking 7%.
To get 7%, one needs to pursue a trading strategy or to successfully cherry pick the winners in the high yielding area.
I am approximately 45% CD’s/T Bills; 40% investment grade; 15% pursuing yield.
No risk yield 5.4%; investment grade 6.2%; high yield 7.3%
DYODD based on your own risk tolerance.
Turns out my yield for investment grade is low.
My investment grade holdings, ranked in descending order of amount held (largest first) and yield based on current price, are:
KTH 7.1%
CPRN 10.3%
KTN 7.7%
AGMPRF 6.07%
ADM 3.8%
GSPRD 6.8%
AQNB 6.2%
SCEPRL 6.15%
ALLPRB 8.7%
CTAPRB 6.5%
APOS 7.07%
RZC 6.88%
RIVPRA 6.3%
BNJ 7.07%
SREA 5.86%
CMSD 5.98%
WFCPRL 6.2%
MGR 6.06%
FITBI 6.5%\
MERPRK 6.3%
BCPRC 6.6%
ENO 5.8%
AGFD 6.05%
ASBA 7.5%
While not US investment grade rated, ENB 10.9% and EBBGF 7.7% are Canadian investment grade quality holdings that would place #4 on my list above.
Westie, What is your YOC (yield on cost) on these? I hold ETI PR instead of ENO I know it’s one notch below in ratings and a preferred compared to a bond, but pun intended I think New Orleans will be underwater before the redemption date on the bond.
Z,
If you are willing to hold a low volume Canadian issue, the Enbridge EBGEF resets later this month at 5Yr + 2.82 which at today’s rates would be a touch above 7%. It’s a 5 year reset so the rate will hold for the next 5 years. I own a bunch of this issue at around the current price.
AJ:
My understanding is that ENB already announced the reset rate on that EBGEF Series 5 preferred on 1/31/24. The company got lucky (again) and was able to use the 5-year Treasury rate of 3.863% to calculate the new dividend amount (see below). Current 5-year Treasury rate hovers around 4.26%. You also have the opportunity to convert into a new security that will float every 3 months. Based on current prices of EBGEF, if you stick with the 5 year reset security your yield will be locked near 7.65%.
But I defer to 2WhiteRoses as he is the site’s expert on these 3 US traded ENB reset securities. His work in this area has been tremendous.
“With respect to any Series 5 Shares that remain outstanding after March 1, 2024, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The new annual dividend rate applicable to the Series 5 Shares for the five-year period commencing on March 1, 2024 to, but excluding, March 1, 2029 will be 6.683 percent, being equal to the five-year United States Treasury bond yield of 3.863 percent determined as of today plus 2.82 percent in accordance with the terms of the Series 5 Shares.”