No matter how much I ‘hope’ that interest rates have peeked out–they have no respect for me and keep going higher.
For this week we are off about 20 cents on the average share which pretty much brings us to even for the last 2 weeks since we had a 18 cents gain last week.
The normal movement in prices when interest rates move up is prices fall and as rates stabilize prices, which have likely over-reacted, start to creep back up until we reach the point where rates again move higher and prices move lower again–at a less ‘panicked’ pace. So this is the cycle we are in now.
So what does one do in these markets? I have been mostly sitting on my hands. I say mostly because I did add to 2 positions this week. I added to my Liberty Broadband 7% cumulative position and added to my Assurant 5.25% baby bond position–both in small quantity–lots of time to build positions and maybe at slightly better prices.
Do banks, brokers, or insurance companies ever issue term preferred stock with qualified dividends — or do they have to be perpetual to be Tier 1 capital?
Af, term dated preferreds are recorded as liabilities on the balance sheet, so therefore it would appear it isnt possible to have one as such for that purpose.
…..Officially this week, the 10 year just broke the multi decade secular downtrend in rates.
You are a gentleman and a scholar.
AF, I had to think a bit as I known and forgot that a few times, but I knew it would come to me eventually, ha. Now Im sure you have noticed some banks selling shorter term subordinated notes (term dated baby bonds), but when I have read the terms they are usually slotted for Tier 2 or 3 capital. Im just using the terms. I dont know know the what it all means!
Banks used to be able to issue debt (liabilities) as Tier 1, but the Dobb-Frank Act passed after the 08-09 crisis eliminated that. Some were grandfathered such as C-N which is still outstanding.
And we are just at the beginning of a increased rate cycle….to me, this does not bode well for the preferred stock sector….
Another ugly day for the canaries (high quality, low coupon yield) issues. I show 21 issues with coupon yields of <=4.0% that traded today. They were off -1.2% today and are down -17.5% year to date.
The median preferred suffered less today being off -0.46%. Here are the 21 issues: ticker, coupon yield, today's change, YTD change, sorted by coupon yield (lowest to highest.)
BML-G, 3%, -1.31%, -17.53%
BML-H, 3.07%, -1.56%, -17.22%
CTA-A, 3.5%, 0.25%, -14.73%
USB-A, 3.5%, 0.79%, -16.01%
USB-H, 3.58%, -1.34%, -19.66%
NMK-B, 3.6%, -1.37%, -7.05%
USB-Q, 3.75%, -0.77%, -19.66%
HWM-, 3.75%, -0.04%, -2.25%
GS-A, 3.75%, -1.51%, -17.99%
PSA-N, 3.88%, -1.56%, -22.14%
SLMBP, 3.88%, -0.14%, -2.14%
PSA-O, 3.9%, -2.21%, -22.71%
PSA-Q, 3.95%, -1.18%, -20.85%
PSA-P, 4%, -1.44%, -21.04%
FRC-M, 4%, -0.97%, -20.65%
GLU-B, 4%, -0.14%, -1.11%
GS-C, 4%, -1.48%, -13.43%
GS-D, 4%, -0.8%, -16.44%
PSA-R, 4%, -0.8%, -20.5%
TFC-I, 4%, -1.39%, -17.44%
USB-R, 4%, -0.74%, -20.23%
Note: some of the coupon yields might be incorrect because they are fix to float or variable rate. I might not have the latest coupon, so you should check this before making any decisions based on the data.
As I have stated before, we think the highest probability is that these trade lower this year. We would NOT be buyers of any of them at these prices. We did mess up and bought 15 stinkin shares on one of these with an old order that slipped by. Poor order management!
Request for assistance from the seasoned folks on the page…..For the existing BB’s and Preferred shares I hold should I just sit tight? They got someone hammered today, for example, WRBPRF was down 2.47% which was one of the highest declines of these types of issues I have seen in single day.
Is the correct approach to have “They are stilling paying the interest you wanted…..consider buying more once rates go up a few more basis points”? Seems like rates are headed straight up so price declines will only continue.
Most of these holdings are in retirement accounts, and I bought them for income to balance out more growth oriented holdings like VUG and VOT.
San Diego, I dont think anyone has replied, because its an unknowable answer.
This was issued in Dec. 2019 when 10 year was 1.80% range. 10 year is close to 2.5% now, so its not only not surprising its dropped it would be expected to. Nobody knows if Fed will act going forward in manner indicated, nor how the long end of yield curve will respond, or future inflationary outcomes.
Everybody has a cracked crystal ball.
And of course everyone owns things for specific reasons, which appears you do also. It will be hard to pick the peak down trough in perpetual pricing. Usually its only known after the fact.
My personal viewpoint has been the same for quite a while. Inflation is strong, and future inflationary inputs are still building in the pipeline. It may peak real soon, but food, energy, wages, inputs could keep it above the 2% goal for quite some time. With unemployment real low, Fed can focus on their other dual mandate to try to control inflation though some of it appears well out of its control.
Typically Fed hikes are not viewed kindly to perpetuals, nor is rising long term interest rates. That background in general is not a positive for such issues. But trying to time anything is tough also. That is why many including me have largely hide out in term dated and call anchored issues which has done quite well for now. Its largely something you have to determine.
Personally which should have no bearing on your decisions, with a wink and nod towards capital preservation, only a small percentage of what I own is fixed perpetuals, but I watch them. And my cash is uncharacteristically high for me also.
If you bought them for income then that’s what you’re getting. As long as they pay you’re making money and it’s only a loss if you sell them. Sure you could’ve found a better entry point if you had the proverbial crystal ball. Bankruptcy risk is a bigger concern for me. Would rising rates or other factors increase their risk of going kaput? That’s the only reason I would panic sell.
As a trader I typically sell so I can buy something better. That’s a judgement call. Doesn’t matter whether I’m sitting on a profit or loss, it’s about current value. Sitting on a pile of cash might work once in a while but most of the time your money just sits there doing nothing. Unless money market rates ever come back.
Martin, like a tired old gunslinger going back for one last shoot out, I went back into SB-D again for a partial divi capture trade. Recent bond proceeds could take some of it out, but it was only a suggested possibility.
SB has little trade with Russia and Ukraine and doesnt have any of those nationalities as sailors. So they stated there is no material impact there.
Completely irrelevant but your mention of a “tired old gunslinger” reminded me of this song about an old desperado who now paints the town beige https://www.youtube.com/watch?v=VN3wDgpuQ-I&ab_channel=kubacheck
Robert Earl Keen
There’s more than one shootout left in the SB gun. Doubled down at 25.16 which I’ll sell back quickly one way or another. I’ve started swapping RTLPO and RTLPP the same way now that they’re back to par. NRZ-D vs NRZ-B has been a good swap. And some wild action in NYMTZ vs NYMTN/M lately.
I have kind of gotten narrow minded and bull headed in my trades. Instead trading between issues, I have just been buying and selling same 3-4 issues on modest rips and dips.
Whatever works. I do a hybrid of several trading types. Arb swaps being my favorite becaue it’s hard to lose money on a swap.
Im more limited in that ability from personal reluctance to trade in Mreits. But issues such as SR-A have had a nice trading bounce range. But I dont swing trade everything, I will trade off relative value between unrelated issues. Works pretty similar. But Im cautious in perpetual land. After basically ignore rate scares last 10 years, I am more sensitive to possible realities short end come rise appreciably next year.
To add to your points, MG, at least in San Diego’s taxable account, there could be another reason to sell and that reason would be right up your alley….. The sizable losses on low coupon IG perpetuals could be valuable in their own right and considering swapping out of what’s owned to realize the loss and replace with a similar issue (if that’s what you want to be in) is something to be thinking about………Ha, as if I[m doing it myself yet……. I guess my long standing aversion to perpetuals in general is finally paying off………..
SDSurfer – you should sell everything and bury it all in your mattress 🙂
Just kidding obviously. Seriously – the answer to the question will vary by individual. Everyone has different goals, are in different stages of life and investing, different levels of risk tolerance, time horizons, etc.
For me, I focus more on the income coming in than the portfolio value. But that also doesn’t mean I don’t opportunistically trade out of certain positions and into other ones. In the 2 portfolios I discuss here (a taxable account and rollover IRA) I have a mix of preferreds, and dividend paying common. I think in the last month the overall value has fluctuated $60K or so. It really didn’t phase me when it was down or now when it is at its highest level ever. I have some preferreds that went under water that I have kept, while I had other preferreds that were under water that I sold. Why did I sell the ones I did – a few reasons. One, I could lock in some capital losses to offset cap gains and use the proceeds to switch into a different preferred issue I felt was either now a better value or provided better income at the same risk level. Two, I have sold some I did not have as strong of conviction in to swap into other issues, specifically term dated and call anchored issues . But that is me. It works for my financial situation .My bogey is a certain $ amount of income per year from these two portfolios (even though right now I am not withdrawing anything from them – just living off other savings). The overall portfolio value is fun to look at but not what I focus on.
So you have to assess your situation, determine your goals and comfort level, and act accordingly. Good luck