Interest Rates Move Higher

It was only a week ago that the 10 year treasury closed the week at 2.41% and now they are trading at 2.52%–after spiking to the 2.55% earlier.

Some economic data in the U.S. has been fairly strong and China released numbers that show improvement from where they have been recently. Not that we fully believe the numbers released from the government, but they are what the markets look at so we have to go with the flow.

With this movement we could see some ‘give back’ in income issues, although thus far that has not been the case–but most certainly the euphoria has subsided.

Our best guess now is that if rates move up toward the 2.60% area we could see some “nervous nellies” start dumping some of their holdings of preferred stocks and baby bonds. If that does occur we will be waiting with money in hand to add to our positions as we have plenty of cash after locking down profits during the last couple of months.

40 thoughts on “Interest Rates Move Higher”

  1. ALLY-A now over 26.60, I need to consider options. Since I do not have any alternatives lined up, holding for now.

    May sell HMLP-A and buy GMLPP

  2. Anyone have direct evidence that Atlantic Power on TSX is QDI? It has operations in Can and US. Thanks, JA

  3. NGL prices an institutional bond offering (no retail allowed):
    NGL Energy Partners LP Announces Pricing of $450 Million of Senior Notes

    Business Wire Business WireApril 4, 2019

    NGL Energy Partners LP (NGL) and its wholly owned subsidiary NGL Energy Finance Corp. today announced that they have priced a private offering of $450 million aggregate principal amount of 7.500% senior notes due 2026. NGL expects to use the net proceeds of this offering to repay indebtedness under its revolving credit facility, which NGL may reborrow from time to time in the future for general partnership purposes.

    The notes are being initially sold to investors at a price of 100% of their principal amount. Interest on the notes will accrue at a rate of 7.500% per annum and will be payable semiannually on April 15 and October 15 of each year, beginning on October 15, 2019. The maturity date of the notes is April 15, 2026.

    NGL expects this private offering to close on April 9, 2019, subject to the satisfaction of customary closing conditions.

    The offer and sale of the notes have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), or any state securities laws, and the notes may not be offered or sold in the United States of America absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable state laws.

    The notes have been offered and sold only to persons reasonably believed to be qualified institutional buyers in accordance with Rule 144A under the Securities Act, and outside the United States of America to investors other than U.S. persons, in reliance on Regulation S under the Securities Act. This announcement does not constitute an offer to sell, or a solicitation of an offer to buy, any security and shall not constitute an offer, solicitation or sale in any jurisdiction in which such offer, solicitation or sale would be unlawful.
    Not all those who wander are lost, Nomad

    1. What are your thoughts Nomad? Seems a bit expensive.

      I currently own both Preferreds, will be keeping a close eye.

      1. Hey Ken, I hope this post finds you doing well and thank you for your question. I have been long NGL.B since 8/17 at around $23.55 and have been reticent to sell it. I also just bought the NGL Preferred IPO NGLPP/NGL.C 3/29 @ $24.75 as greed got a gold of me and I just couldn’t pass up 9.625%. I was hoping that the large bond refinancing they just completed was going to be staggered between 5-10+ years at various rebates, but 7.5% bullet for 7 years is “fair” I guess. NGL straight LP equity has done quite well as it’s up 31.5+% the last 52 weeks, an incredible revenue producer at over $24+ billion, poor ROA/ROE and just too much debt…Comments are definitely welcome and encouraged.
        But people are oceans. You cannot know them by their surface, Nomad

        1. Thanks for your input Nomad, appreciate it. In this environment, I’m definitely holding both for now. Debt burden is a little worrisome but I guess that is expected with rates at around 9.5%. Will watch for any cracks in the foundation going forward.

          1. Ken, I’ve been doing some preening/profit taking this week; if I can’t find any bargains to invest in then the baby bond and preferred market “must” be overvalued. I took nice profits on ALLY.A, ANH.A, AHT.G, CTBB, STAR.I, SRC.A and IVR.B. Of course the issue now is where to put all the proceeds. I bought more AGNCB, CLNY.E (gulp) and the IPO NGLPP/NGL.C. I even bought a position in common RDS.B as there is just too much cash laying around and I’m looking for a short term move to flip the mega integrated oil company. I am a very conservative investor and am doing another deep dive analysis into the baby bond area this weekend to see if I can come up with something that is attractive.
            Hope all are having an awesome weekend, Nomad

            1. Nomad, most of my cash is in very solid preferreds also…But I have in past month or two reached into the sin bin and it has played out well so far. Though I havent sold yet..NGHCN has popped a couple bucks since I bought, added back NSS, GLP-A, and RLJ-A to the nastys…Went really into trash buying HL-B at 53. Hecla has been around since the 1880s and probably has been a financial trainwreck since the 1890s yet it lives on. This is right around the 5 yr low and pops frequently into $55-57 range so Im having a little fun with this one. Plus not many Gold mining preferreds out there…And probably for a gold reason! 🙂

              1. Grid, I use to know Phil Baker the CEO of Hecla through one of my friends who lives in Vegas. Baker was also affiliated with Questar a gas company that (D) Dominion bought a few years back. I just looked HL up and the equity have AVERAGED -7.5% the last 15 years and -34.7% the last year (ouch). I am a long term investor in physical metal and am going to a coin show tomorrow (I’m usually one of the youngest people at the show). The precious metal companies and the physical metal has been dead money for many years. I look at it as a hedge against a dollar collapse and the $22+ trillion of debt is scary stuff we have no way to pay this debt back except to inflate our US currency which should help precious metals greatly as they have no counter-party risk and have been used as stores of value for 1000’s of years.
                Gold is the money of kings, silver is the money of gentlemen, barter is the money of peasants – but debt is the money of slaves. Nomad

                1. Nomad, I am kind of preferred “historian” and research the past of any old one before I buy….And the history of HL-B is certainly interesting mostly through the downs and downs of the company, lol.. The float of HL-B is just a fraction of what it was since issued in early 1990s. In the depths of credit crisis when bank preferreds were trading 80-90% below par and even the ute preferreds were down 40–50%. This rag preferred never broke 20% below par. It is definitely a ying and yang preferred. Except when Hecla almost went under in early 2000s, then it really tanked! The 2021 senior unsecured bonds actually trade higher yields(though near par) than the preferred which never makes any sense. But neither does this preferred as it basically has always been that way.

                  1. I texted my buddy in Vegas that was/is friends with Baker and he reminded me that I interviewed him as CEO of Hecla at least twice on my old investment radio show over a decade ago (I don’t remember it, but then again I’m getting older). As you know, Hecla has a very long history of mining in the US. Over 125+ years ago the BIG companies were in mining, agri or railroads. If any of these companies had a very long term business plan they should be the biggest companies (and most profitable) on the planet.
                    Smile, Nomad

                    1. Nomad, it just kind of shows how irrelevant these companies are in the scheme of the stock markets. Hecla is the largest producer of Silver in US and extracts over 10 million oz of Silver annually (also some gold and zinc, etc) and yet has only a small market cap of 1.5 billion.
                      Series B has only about 160,000 shares outstanding. It had a 2004 offer to exhange the $50 par issue for $66 in common stock and a lot of shares were converted at that time….The Series B has had its dividend suspended several times over its history and then later repaid. If it didnt have gold and silver attached to it, it would be at $35-$40. More in line with other rag issues like CBB-B.

              2. Trivia: Years ago there was a gold pref that paid out in GOLD, I believe it was FCXprD. Actually it was a decimal of the spot price of gold paid quarterly. I wish I still had it, got called.
                PS: I raised my pm insurance with some SIL recently to a 3% position. At least it’s CHEAP.

                1. Joel, the company that actual paid(s) their common equity dividend in gold or silver is Gold Resources Corporation (GORO). The preferred you were knowledge about (very impressive BTW) was Freeport McMoran Cooper and Gold*&sopt=symbol
                  Sadly, they were known for hedging gold and silver when the price of silver went to $50 and gold to over $1900 and they did not participate much because they were “hedged”.
                  Wishing you profitable investing, Nomad

            2. Any thoughts on TCRZ Nomad? Has a bit of call risk but at current price it is not much.

              Not sure if BDCs are your thing, but pretty solid baby bond from a pretty solid company.

              1. Ken, before I give you my thoughts you may want to just simply call
                THL Credit, Inc.
                100 Federal Street
                31st Floor
                Boston, MA 02110
                800-450-4424 to talk to the CFO or at least email IR and chat with them as I do not get a good feeling about this BDC:
                I looked at the prospectus
                and it says in the covenants that THL must have at least 100% asset coverage at all times for this very large (for them) $55MM note. I’d like to see what the actual asset coverage currently is and IF the BDC plans on taking on any additional debt or if they have a shelf registration or will be doing any sales to strengthen their balance sheet.
                Some of my concerns:
                52 week change in their equity -17.31%
                Distribution cuts from 0.34 to 0.27 12/30/16 and from 0.27 to 0.21 3/29/19
                Profit margin -15.8% ROE -3.31% Net income -10.6% Quarterly revenue -14.90% an overall strained/poor balance sheet, 1.18% BETA, only $67 million in revenue, 72.96 total debt to equity.
                This is just not for me my friend, Nomad

                1. Thanks Nomad, I appreciate your thoughts. BDCs are a tough business to wrap your head around. I can’t really argue your points above but I do think THL is turning around the business and becoming lower risk. They also are doing more share-friendly things though the majority of BDC Management Teams make out like bandits. TCRZ seems very safe with a short maturity and I actually think it will probably be called sooner rather than later. Hoping it won’t be for a little bit, as they would probably need to issue another one with similar terms as TCRW to call TCRZ.

                  I am not risk adverse and play around in the BDC space, I actually own PBC as well. Bought it much lower. That has a much longer maturity though and I trust THL over Prospect (both have major warts). But I feel both baby bonds are safe for now, a decent chunk of BDCs screw up a lot but total blow-ups are rare. Though I’m not sure if BDC funds now being allowed to employ leverage up to two times total debt to equity is a blessing or a curse.

                  1. Ken, thank you for your interesting reply. My point is always as long as an investor is doing there OWN deep due diligence before investing (especially in something with real risk) then they have their eyes wide open. There are just too many articles and posts that are written that skip over the risk, volatility, problems and only focus on the high income or try to manipulate the poor information to prove their point. The blow up on income investments in December was just the appetizer of issues that could blow up a portfolio.
                    I wish you all the very best of success, Nomad

            3. Alas, wanting to make money does not make it happen. To every thing there is a season, and a time to every purpose. The week before Christmas was the time to make money, and from there a diminishing extent. I am in the same boat as you in that I have periodically taken some profits, mostly derived from that time, and although holding a higher quality basket am now finding the market pricey. I did pick up some of those recent IG offerings and that composite is up 2.5% already, and also along the way I speculated with NSS, TOO-E, and some CHK preferred. I remain 100% invested but skeptical awaiting the next season.

  4. Agreed – I’ve got bids out to sell 1/2 positions in a few of the PFDs that have bounced since December like was discussed earlier this week.

    1. timdman–I have let go of most of my bouncers–just have 2 issues left-one is NEE-N which I was in–let go–and have re-entered.

      1. I let go of half of EPR-G and half of CFG-D. Didn’t want to let it all go cause there’s nothing out there with which to replace them…but there will be. Trying to learn patience.

        1. Yeah, I am really struggling to find replacements for the ones I sold 🙁 Everything is up so much, I probably need to be patient. It’s hard sitting with too much cash…i wanna make it work for me.

          Ideas appreciated.

          1. In 2019 – I have put some of my cash into an Investment grade (only) ETF. It’s is PSK from SPDR SER TR WELLS FARGO PFD STOCK ETF. It pays 5.6%.

            Prefer to hold individual preferred issues, but when they get too high, I sell them and move some of the money here. Beats the 2.3% in money market funds.

            Waiting also, mostly for new issues I can hold long term

            1. If you look at the holdings, you will probably recognize all of the preferred stock holdings. The dividend is monthly payer at 0.20 per month every month

            2. @SteveA, I appreciate the ETF info. I am sitting (and normally do) with a large chunk of cash. At times, sleeping and comfort gives one the best returns on funds. Do you know if the PSK dividends are qualified?

          2. Open to ideas: There are ETFs made up of prefs out there IF you want a concentrated portfolio of prefs and no cash for your reasons. Cash can be liquified easily when you have a buy need. You get huge diversity.
            If this is an idea to research for you, check ‘days trading at NAV” on their sites, exp ratios and port. makeup. I have had some other assets liquidate and have been moving slowly into prefs and BBs reaching only into IG.
            Need for Strategy: Since I am receiving all taxable proceeds from asset sales I have had to rearrange IRA/HSA so that mostly QDIs are held in taxable accounts, BBs and non-QDI in IRAs.
            I say all that because I needed TIME to let it average in. I used EPRF (low volume compared to PFF, but all IG), two term CEF (which I have liquidated down in Jan) and two term CDs (which I dated until 2019 for IRA contribs) to stage out my self directed choices into my “entire-view portfolio”. It’s been tough turning the ship around. I knew it would take time to build out, so I used the above ‘cash holding vehicles’ to liquidate and reallocate as circumstance arose. If I had to, I could have just waited out a storm like we had in Dec. It has worked well for me. Cash seems to be trash for a long time so we search and sometimes wait for opportunity.
            I would suggest have a strong plan thought out as to where you want to go over a timeframe of say the next year. Everyone is different. I am only 61 and really do not want to touch much of the income generated, but want cash to compound into diversity over the next few years. I’ll take SS as soon as I can to allow for more time to compound and de-risk my portfolio because of unknown market timing; there may be a crash event!
            I am also liquidating other non-market assets to station in. I think this will help reduce Market Risk. Just a quick snapshot of a Plan I have worked out for my situation over a full year.
            VERY best Pursuits and just THIMK alot! JA

            1. Joel, you are “only 61”? Didnt Mick Jagger say he would rather be dead than 30? Oh wait, he must have changed his mind a while back as he is over 75 now, lol…Im not too far behind you!
              I am fully invested in preferreds and have been that way for 6 years plus and exploited a lot of preferred anomolies that appear to be drying up as attention to this area has made it harder to exploit. So going forward I am assuming more “yield based returns”. I certainly appreciate your “reduced market risk” comment. But we know its just a reduction, as they can be nearly as volatile as equities, since they well, actually are in part or whole depending on the issue.
              A cynic’s comment one time always resonated with me and I dont discount it. Preferreds are the “worst of both worlds”. They act like equities when they are cratering and act like bonds when yields are rising.
              Like you, I just reinvest my income, and I doubt I really ever will need it, but its there if needed. Besides, like you I will draw my SS early at 62, in a bit over 7 years. I will be flush with cash then as my SS check will be about $115 a month before taxes…What will I do with all that SS money? I have no idea.
              Maybe a dinner date with my lady once a month? 🙂
              Heading off to your neck of the woods today to the Enterprise Center to see the season ending finale…LGB!

              1. Gridbird, you were certainly on the ball recognizing the benefits of HY preferreds and BBs several years ago. it has taken me a number of years to arrive here. i do agree though that we still need to be watching the preferreds and baby bonds very closely. we saw that recently with AFHBL where the baby bond dropped >30%. while i don’t keep more that 1% of my portfolio in any one preferred it still hurts to lose a couple of thousand so quickly, it certainly educated me as to the risks. I am usually very careful and i sell the first hint of impropriety or mismanagement. i just sold my position in RILYH because supposedly management forgot to make a phone call to terminate a contract which resulted in a law suit for 130 million. i figured that if they are that stupid i don’t want them managing my money. Also Tim had mentioned that he thought that they were not very transparent and he could not clearly evaluate them.

                1. @libero – do you have a link to details on that RILY lawsuit? I searched but couldn’t find it.

                    1. @Nomadicmist – thanks for that link.
                      Goodness, that is some considerable egg on the face by whoever slept on that notification. Appears the court didn’t rule on the $130M fee yet, but it doesn’t look good for B Riley..

                2. “i just sold my position in RILYH because supposedly management forgot to make a phone call to terminate a contract which resulted in a law suit for 130 million.”

                  B. Riley secured necessary funding for their client but was not a party to the merger agreement. Hard to see how they’re at fault for this deal going sour.

                  1. I am a bit flakey when it comes to HY, I had a fairly large position in two rily securities. i sold RILYL but i still hold RILYI. The article i read implied that RILY mgmt forgot to make call that may result in a large fee.. you may be right that RILY is not at fault. I am not exactly sure what the issue is but i chose to scale back a bit.

              2. Just as a side note if Tim will forgive me using the site:
                Bobby’s Place in Valley Park is loaded with a bunch of Bobby Plager’s memorabilia. I took the friend of mine who is a Bruin’s fan in there for a beer and just let him figure it out once he started looking around. North of I-44 on Hwy 141. Good fun.
                Go Blues 50:1!

                1. Just watched a win today at Enterprise, Joel. Yep I have tossed a few down at Plagers too.

            2. joel, we are very alike. i am also about the same age (60) and still working. i have taxable accounts where i keep QDi type preferrerds. i keep other preferrerds and baby bonds in IRA and 401k. Also 25% of my money is in a target 2020 fund, 10% in a mutual fund which i let fidelity manage. 25% is in cash due to being risk averse and taking profits. i have recently been selling some preferrerds that are up over a years dividends. i have also been reorganizing, i got rid of most of my cefs because they dropped so badly in december, i replaced with Preferreds and Bbonds. Do to interest rates flattening and the thret to them going down i have been switching out of callable preferreds that are way over par to non-callable to reduce the risk of being called and losing my gains. i have been buying preferreds that are below par and will become callable. my theory is that if interest rates start to drop a lot mot securities may start to be called, so they can be replaced with lower interest rate securities. Anyway due to the this i have ended up with too much cash. It’s probably a good problem to have 🙂

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