I have just been sitting back watching the markets–interest rates as much as any stock market, given that I own no common stocks.
With the 10 year treasury sitting around the 2.22% area one has to believe that a recession is coming into expectations. We know that global funds are moving strongly into US Treasurys, but even with this being the case the supply gets larger and larger as the government spends like crazy and the Fed balance sheet continues to runoff – so no demand from the Fed.
I just looked at the average price of a $25 baby bond or preferred stock and they have barely budged this week–I expected to find them down a few cents as the ‘baby was tossed with the bath water’ sellers emerged–they didn’t emerge.
With the spectre of a potential recession later in the year or early in 2020 income investors should begin to watch a few of their holdings for weakness in issuer finances. For instance we would be sceptical of some lodging REIT preferreds to hold up during a recession–for instance Ashford Hospitality (NYSE:AHT) has not done well during this long growth period so how are they going to hold up during a recession? Baby bonds and preferred stocks from all of the BDC (business development company) are ones I am highly suspect of performance during a recession. It is true that none went broke 10-15 years ago as we had the global economic crisis–but most of them are newer companies (less than 20 years old) and have not been truly proven during a recession–and they are more highly leveraged now than they were previously.
Whether we have a recession is yet to be determined–but considering that the Atlanta Fed GDP Now shows a forecast of 1.3% growth for the 2nd quarter it is likely we are seeing a slowing–beyond that it is anyone’s guess.