After the recent pops in interest rates we were curious as to whether they would remain above 3% in the days and weeks after the move. Just surveying rates today it looks like the 10 year treasury is firmly in the 3.08% area and will probably not move back below 3% anytime soon.
Higher interest rates are likely taking a tiny bite out of the housing market as housing starts and mortgage applications both came in a bit lite of where the consensus had pegged them. While rates are not out of control there are always marginal buyers that are excluded from the market place when rates moves higher. This is a case of the “haves” and “have nots” –the “haves” are mainly not affected in a great way with somewhat higher rates, while the “have nots” are living on the edge all of the time–including in housing. Fannie Mae has done their best to get the “have nots” into housing with 3% down payments and with rates moving up folks that have no cash for a down payment begin to be priced out of the market. Recall after the financial crisis 10 years ago the need for a 10 or 20% down payment on a conventional loan was a common requirement. Fannie has moved lower and lower and now we are back to trying to put the taxpayer on the hook for a bail out when these low down loans go bad.. Interesting times are ahead in the housing market during the next recession.
Today we began to look at the super high quality names in the preferred marketplace. We would begin to deploy a few funds in these securities if the current yields hit 6%. The issues we are referring to are the high investment grade issues from CEFs. Our list is here.
These issues are almost all issued by one of the related Gabelli companies. This includes Bancroft and Ellsworth, both of which are managed by Gabelli. All of these issues are for those seeking very high safety, with little regard for maintenance of Net Asset Value (NAV). These are very sensitive to interest rate movements, but you can sleep well at night knowing the income stream of these is very safe.
Here is an example of the interest rate sensitivity of these issues. Ultra safe, but larger movements in share price as rates go up.
As rates tick higher the odds of these issues being redeemed becomes smaller and smaller as almost all of the issues are perpetual.
Our thoughts are simply that we would very slowly–glacier like–move into a few of these as current yields on them move above 6% so that over the course of maybe a year we have a 10-15% position in them. Of course one never knows for sure when rate rises will be over so better to move into some of them slowly.
Note that while BDCs are CEF’s we DO NOT include them in this list. This list is primarily of CEFs which hold Level 1 assets (stocks). Business development companies hold Level 3 assets (meaning you have to trust management for valuations). We like a nice clean closed end fund investment where we can observe the securities they hold on a daily basis if necessary.