The 10 year treasury is popping higher again this morning as fears of massive economic stimulation are causing inflation expectations to gain traction once again.
The 10 year treasury had traded as high as 1.73% yesterday before closing the day at 1.72%. This morning we are tacking on another 4 basis points to around 1.76%.
Thus far this hasn’t ‘hurt’ income issues, but moves higher from here are probably going to cause some pain. Once again I remind folks that if we can keep the interest rate moves higher to only a few basis points here and there the pain will be muted–a sharp 1 or 2 day move of 1/8% or more could cause a panic of sorts inflicting severe damage on the high quality, low coupon issues.
We shall see–we could see some extraordinary opportunities in the months ahead.
Some quotes from a recent Jim Rogers interview:
1. “There are gigantic amounts of money being printed. It takes a while to build a factory, but it takes 10 seconds to go online and invest. A lot of money is going into markets all over the world, and I don’t see any reason for this to end. I see bubbles forming, but I don’t see full-fledged bubbles in stock markets yet.”
2. “We’ve had bubbles before, we’re going to have them again, and they always end badly. If you buy the bubble stocks, you’re probably never going to make money.”
3. “This is not my first rodeo. I’ve seen this movie before. I can remember the late ’60s, if it had ‘computer’ in the name, the stock went through the roof. Even if it was a laundry, it didn’t matter.”
4. “You see a lot of new investors piling in, talking about how easy it is to make money, how much fun it is to make money. You see SPACs coming in, which often come in at the end of big bull markets. Remember the Mississippi Company, the South Sea Company, that was 300 years ago, same thing. All this has happened before, and it is happening again now.”
5. “Bonds have never been this expensive in the history of the world. So, bonds are definitely in a bubble. Unless you have a special-situation bond, I would not own bonds anywhere in the world.”
My concern is that most selective media-educated market participants believe it’s economic stimulation. It’s vote purchasing & wealth redistribution. Big differences. This was printed last September: “Bank of America said US stocks had suffered their third-largest outflow of funds, with investors pulling $25.8 billion out of equities in the past week.”. Interesting timing.
$1.9T printed and dropped from the whirly-birds with what, ~9% actually going to Covid related issues. Now we are looking at a $3-5T ‘infrastructure’ bill with ~10% expected to actually be spent on things related to the historical definition of infrastruture (bridges, roads, grids, etc.). And then you’ll have taxes going up ~7% +/- across the boards and the continued war on the energy sector. And after that, and after that, and after that, and…
Getting harder to stretch these ‘dollars’. Interesting…Almost 2 yrs ago, a dollar in California was valued at 87 cents. What do you think that same dollar is worth today, 2 years later? Don’t worry, it’s still backed by the full faith and credit of the whirly-birds circling the inner cities.
Really a great post Affinity. I agree with you completely. All this printing of money and the total nightmare happening at the border will come back to bite all of us on the ass down the road. Think housing, medical, welfare/food stamps, education, etc etc. Who is going to pay for all of this??? Where I live gas is already up over 70 cents a gallon. When you elect radicals you get radical behavior.
Please, no politics!
Agree, no politics.
One of the first rules of Investing is Don’t invest based on emotion. Politics today is mostly emotion.
We may have to pay for it through inflation and possibly taxes but not necessarily. .The US can create money out of thin air, it does not have to be a debt. The real issue is if we create new money will that create inflation? the 2T of stimulus has not caused significant inflation yet, if we create money and spend it on infrastructure will that create inflation? This country needs to spend money on a lot of stuff, for a start we need a new electric grid to support all these new electric cars. Look what happened last year in Texas.
Its mainly going to hurt the high investment grade issues that are popular on this site. Will be some buying opportunities once they drop enough.
i had just posted this in Monday morning. Belongs here. I agree could be huge opportunity coming. I am sitting on LOTS and LOTS of dry prowder.
I guess I am never going to be aligned with the market’s thinking. Four years ago, I was convinced that massive spending was going to ignite inflation. The lesson I learned was to stop projecting and wait for the facts to prove/disapprove your opinion.
Now, i am waiting or the facts to prove/disapprove inflation concerns. But the bond market sure is not waiting as the 10 year hits 1.75% interest. I guess somebody changed the rules and I missed the memo. Projections now matter more than facts (although I cannot find any credible concerning inflation projections).
At some point the sub 4% yield on preferreds SHOULD (who knows) go up with the ten year at `1.75%. It is what it is. I don’t have low yielders. Glad that I do not.
Should have read the sub 5% yield (mid 4%’s) should go up.
Steve, I can relate to “dry powder” after a sizable maturing cd over night We’ve got 38% cash over our 3 taxable and qualified accounts. Need decent yielding qualified dividends, reit income, prefferreds, baby bonds, muni’s, cds you name it I can make anything work some where. My only restriction is and always will be nothing below investment grade. I have no idea what interest rate it will take to get the job done. I’m looking forward to some
renewed BAB’s but I’m sure they won’t be the yields of 10 years ago.
The problem with having a lot of dry powder is it can stay dry for a long time. Reduce losses when there’s a crash but not enough to make up for the missed profits over they years.
That depends on your benchmark. Since Jan 2018, I have lived solely off my investment funds paying 100% of my bills. I have also, helped the kids pay down over 50% of their insane amount of high student loan debt. If I am benchmarking againts the market indexes you are 100% correct. If I am benchmarking against my personal financial objectives, I am doing extremely well. it is all about goals, objectives, and benchmarks which are unique for many of us.
Rates are only back to where they were last February before the pandemic.
Agree. I have not looked but the last time the yields on the ten year were in the 1.75% range, weren’t quality preferreds yielding 5% or more?
One solid benchmark reference point is PPX IG rated baby bond issued in 2013 with 5.9% coupon. 10 year was a smidge over 2% at issuance.
So, lets call it 2.8x the 10 year yield. In my dreams, I expected (or hoped for higher). That would imply, investment grade issues pricing at about 4.9% right now.
Things will start to slow as prices go up. You can call it whatever you like.
Manager of a Pacific Supply who is one of my customers said projects are getting unfeasible to start or finish as materials costs have risen so much in past year. Contractors could be forced to honor bids that they are losing money on, leaving projects stalled and bankruptcies.
Homes in mid- range are going crazy. Radio told of one home going on the market this past week here listed for 399,000 had 125 bids in 3 hours and sold for about 450,000. Lot of cash buyers. On other hand new subdivision down the street in upper 750,000 has only sold 3 homes in last 6 months and paid me to put a sign on my property for a yr.
Materials are getting scarce, I tried to buy a bottle of Mapp or Propane past weekend and after going to 3 stores was told by HD all their stores in the area are out.
A buyer I talked to said he tried to buy a T/T of 2 x4’s for his company to use for pallets, went to place the order the next day and broker told him that load sold and price from the mill was higher. Just in 24 hrs
CM, agree the construction stuff. A quasi-monopoly of mill owners seem to be minting millionaires daily. Common goods have become strangely unavailable, there are serious supply chain problems out there. Seems to be supply/demand problems all over the board. Major cost of living components like housing, fuel, auto’s, health/home insurance, property taxes are all up double digits but somehow our government CPI doesn’t indicate inflation. When even even college students that I see start to rail about an inane high cost of campus living, something is going on.
I own 12 IG illiquid utes and their current yields range from 4.0% to 4.73%.
But if you like BAC-L or WFC-L, both now yield over 5%. They can be easily bought.
And then there’s EPD. 😉
GLTA
camroc – I know EPD has a good yield (and I have it for years) but I am wondering why do you see it differently compared to any other pipeline MLPs? Just curious
There are lots of reasons, JR, too many to adequately cover in this post. If you’ve owned it for years, you likely know them, too. A few:
Its footprint and verticality
Distribution history
Mgmt participation
The Duncan family
Little or no fear of being kindered or kelcyed
Steve the other variable is the “credit spreads” between 10 yr, IG, and Junk spreads. Right now everything is tight spread wise.
You can get situations where 10 year stays stuck in mud doing nothing and the credit spreads widen out. This will cause preferreds to tank too. In Dec 2018 credit spreads blew out and preferreds dropped quickly despite 10 yr moving down. The credit spreads tightened quickly again and preferreds went back up.
Gird bird: I hear you but your way over my head with”this credit spread stuff” We’re talking AAA? to junk and we are trying to price securities? I usually operate by the seat of my pants but I’m not comfortable at the moment. On those occasions I usually set tight and see what develops. Thanks
Mike it isnt as complicated as it may sound. And there really isnt much we can do about it as by the time you see it happened its too late anyways. Its basically just showing “risk on or risk off” and/or “chasing yield or not.” Market still is in chase yield mode, so that keeps spreads tight.
You can look at this chart and see the Baa IG spread versus 10 year here. Right now its historically on the tight side. You can see that quick spike in 2018, and the March 2020 spread widen also.
https://fred.stlouisfed.org/series/BAA10Y
Grid, I had already put that baby bond PPX in one of my watchlist labeled “10 year treasury benchmark”. Now with this fred’s data chart I’m good to go. Great advice and instruction thanks so much. Mike ps. and a thumbs up to Tim again, this site is a wealth of knowledge.
Thanks to you and Tim, the unrated yet reasonably safe ones are darn good positions in this time at least for now. I neglected to see my 186 shares of COWNZ, the lower 7.35% coupon one called and alerted by Vanguard confirmed with their Bloomberg machine. COWNL not callable until June 15, 2023 remains to be a jewel. Tim’s ECCW seems me an excellent replacement. Sold some your FPI-B to buy ECCW yesterday. Saw your post at Silicon and will look to buy back. For high yield names, GLOG-A fully priced, GLOP-A plus SB-C, SB-D and even DLNG-B from Richard Lejeune’s Panic list article published in SA without subscription are working at least for NOW. I did not buy sufficient Long Term Care insurance for my health failing wife, these high yields should help just in case ….
BTW, got 2 shots of Pfzer vaccine. All these vaccines should help IMHO.
SteveA:
Maybe your initial “sub 4% yield on preferreds SHOULD (who knows) go up with the ten year at 1.75%” was the correct assumption.
Two PSA preferreds (3.875 PSA+N and 3.9% PSA+O) both continue to trade near $25. PSA+O trades at $25.46 – for a paltry yield of 3.83%! This thing refuses to go below $25.
Who buys this low yielding stuff? ETFs?
Also – Has anyone noticed that the 6.7% Pitney Bowes baby bond (PBI+B) is back to $25? Any rumors of a call happening on that one?
I think the next crash will be so bad that holding even top investment grade issues may not save you. Thats why I look at this market as more of a grab what I can aggressively and then run for the hills and then wait for EVERYTHING to be on mega sale.
What is great is when people run for the hills with fear. Then people like me buy at great discounts, and keep buying as they continue to fall. Then 3-6 months later, investors realize that 1) the pile of cash is not earning anything, 2) They dont see the cha ching of money from interest and divy payments coming in 3) CD’s, savings accounts are not where they want their money earning long term 4) The companies of the stocks that they owned aren’t going bankrupt 5) Over time, they forget about the red ink of unrealized losses which turned into realized losses. 6) Their bottom starts to hurt from sitting on the sidelines 7) lastly… they want to “Get back in the Game”, as investing is subconsciously seen as a game by many.
Greed ultimately settles in and stocks start to rise and for many they have to make up the x% lost in selling and the claw back. Wash, rinse, repeat