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Interest Rates Trying to Push Higher

After a few days of dipping into the 4.53% just a few days ago interest rates are trying to push higher once again–the 10 year treasury is trading at 4.74% right now at 5 a.m. (central). Folks are saying that these high rates are doing the work of the Fed and over time – months and months this may be true, but the underlying cause is a bit scary – too much supply period. We will see supply continue to be heavy for years to come–will there be demand for all the paper at current interest rates or will investors demand higher rates? A slowing economy caused by high interest rates isn’t much of an answer to a spending problem–in fact over the course of months and months (or a year) the slowing economy will cause larger deficits as tax revenues slow. Another fine mess we have on our hands.

I’ve continued to CD rates – on Fido this morning the top rate is 5.75% which is a 5 year, callable from Southern First Bank–the issue is callable starting in 6 months. Over at eTrade there are 5.7% CDs available for 1 or 2 years – both are callable. I think we will have higher rates soon–can we see 6% yet this year?

I am looking forward to earnings from the regional and community banks which we will see soon – starting next week and then into October. As noted I held preferreds in numerous small banks–and have unloaded some for decent gains, but I continue to hold a number of them. Almost all these issues are around break even (including dividends). I had decent gains in all of these issues, but let some of them slip away. I am looking to sell these issues and may do so at any time – I am concerned about commercial real estate with some of them although they haven’t shown great stress to this point in time.

Once again today we have a number of Fed yakkers–and it is fair to assume they will be dovish in the short term, but this is baked into equity markets and interest rates will move independent of their jawboning for now–their yakking is loosing its punch.

We have a few economic reports this morning–retail sales will be parsed for the ‘health of the consumer’–we’ll see.

13 thoughts on “Interest Rates Trying to Push Higher”

  1. I’ve been doing heavy trimming of profitable and near profitable stocks- now have about 51% in cash & equivalents, with more for sale. I think things will get ugly all over- or maybe I should say ooglier, so will take shelter mostly in 1 and 3 mo CDs. Short end treasuries aren’t really any better, and are out of my comfort zone since I’ve never traded them. Newbie Q: EX: If I did buy the 5.5% 3mo Treas at Schwab, does it just mature and pay like a CD, or does it go to a bid/ask?
    A 6% one would be even nicer!

  2. 10 year FHLB callable notes with 6.5% handle YTW. AA+ credit with call risk.
    I think one is getting paid for the call risk. Looking at 10 year CDs at the 10 year maturity the spread of a callable over a non callable is only 0.675%. These bonds have a spread of 168 bps over equivalent T notes and have a higher YTW than at any maturity on the Treasury YC.

    6% coupon GNMA MBS bonds are now nicely below par.

    I just think there is a lot of value in agency notes with embedded call options.

      1. I think he means 3130AXHQ4, 6.55%

        Rates have gone down though – earlier in the month we had 3133EPXK6, FFCB 10 year @ 6.7%, and 3130AXD62, FHLB 10 year @ 7.0%

  3. Tim:
    As a former banker, my thoughts on upcoming bank results.
    – As we have already seen, the “too big to fail” banks are different animals from regional and smaller banks. They are prospering in the current environment.
    – I believe the regulators are doing everything they can to encourage “kicking the can down the road” for problems in commercial real estate and securities (Treasuries) which have lost value. I don’t expect either of these issues to cause dramatic downfalls.
    – Where I do expect problems is Net Interest Margin and Charge-Offs. The days of free deposits funding fixed interest term loans are gone. To retain the deposits, banks are now having to pay market rates with some loans still fixed. (At my workplace, we still have multiple 4.25% and 4.5% loans outstanding).
    – Chargeoffs have to increase as the toll of higher interest rates impacts weaker borrowers.

    1. Thanks Westie–a very common sense logic I think. I see BAC has $131 billion in losses on the hold to maturity portfolio.

    2. Westie during the GR banks and savings & loans started calling home equity loans and demanding full payment on credit cards from people who were paying interest only on their bill. I wonder how close we are to that?

  4. The damndest thing is despite big upswing in yield on long end, 5 year noncallable CDs still havent broached the 5.10%-5.2% range I bought during the mini bank crisis back in March. But time marches on too quickly. The CDs I bought arent 5 year CDs anymore, but less than 4.5 year CDs now.

    1. Just think of it this way, if rates continue their march up, your 5 yr callable will magically turn into uncallable, ha wala.

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