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Look at Those Interest Rates

Wow!! The 10 year treasury is trading with a yield right now of 4.28%–who would have guessed that Fed yakkers who had worked hard to jawbone rates higher a few months ago are now talking in the opposite direction. Of course in the long term markets and supply and demand will determine where rates trade at – in the short term who knows. Yesterday we had no fewer than 5 Fed yakkers. Today we have a couple more.

Today we have a revision to last quarters GDP–I don’t think this will be a market mover–just a tweak to numbers already released.

I reviewed CD rates this morning–Fido still is offering 5.55% for a 1 year callable from JPM–but even 5.4% on 3 month issues. eTrade is showing a 5.65% callable from JPM with 5.4% on a 3 month. Still surprisingly solid rates. I will have quite a bunch of CDs maturing mid December so will have decisions to be made–if short term rates hold in the 5.2% or slightly above area I can see doing some 3 month issues, but no doubt I will be buying more preferreds and baby bonds. I have my eye on some buys now–additions to current holdings. Even the Tri-Continental issues I highlighted has the potential for over a 10% total return in the next year–lots of good targets out there yet.

Well it looks like we will have a little party in equities with the S&P500 up almost 1/2% premarket. Fed official Loretta Mester speaks at 12.45 p.m. (central)–maybe her hawkish tone will bring things down–or maybe she will reverse directions and jump on the dovish bandwagon–who knows?

25 thoughts on “Look at Those Interest Rates”

  1. Could not resist BAC/B – 6% coupon and under par. If this is not as good as a CD I’m not sure what is. Sure they may call it, but not anytime soon I bet.

      1. yaz – I looked quickly and didn’t find an answer…. bot a small amount anyway assuming at worst it would be a 6 month call. plus I already have a Synchrony account.

  2. I have an outsized amount of $$$ maturing tomorrow and a lesser amount in December from some 9-month treasuries I entered back in Feb/Mar. Now, I am wondering how to allocate. Maybe half into cash equivs like CDs or short duration treasuries and half to baby bonds/preferreds.

    I have some targets for the latter but I’d love to hear some more discussion on ideas here!

    1. I also have a lot of 3, 6 and 9 mo treasuries maturing. I think I will leave some portion of the maturing money in cash for cherry picking preferred’s. However, IMHO I expect interest rates to stay where they are for the foreseeable future.

    2. December is a big rollover month for my CDs/short bonds. Happy to be looking at 5.0% yields rather than 0.5%. I have lengthened maturities, added real and faux agencies and non-bank corporates with higher yields (and risk) and bought longer-dated, higher-coupon callables. FWIW – when in doubt, MMFs work well.

      Average portfolio maturity is now ~14 months, up from 6-7, on the way to 18-24+ months by late December. (Ignoring first call dates. And I do expect calls in 2024.) Average portfolio yield is ~5.5%. I benchmark 4% for draw purposes.

      Baby bonds and preferreds are not on my holiday shopping list. Topped the tank earlier in the year. Full up there. Weary / wary of overnight bank failures, drive-by go-darks and single company risks. I am looking at utes, non-K-1 MLPs and yield-oriented ETFs and an occasional REIT.

      JMO. DYODD.

      1. Bear, like what your saying. I think in the market right now a rising tide is lifting All boats including the higher risk REIT’s and banks. Interesting that a lot of people are talking about CDs and treasuries maturing in Dec and wondering what to do with the money. If it goes into the market for sure we get the Santa Claus rally. Just not sure about after the holidays hangover.
        I’m really trying not to be tempted to rush in and buy something that is going up past what I think is a good deal for higher risk, unless I am just going to flip it.

        1. I also have some dribbles of CDs maturing starting in early February. But well over half of my CDs are 2027-2028 non callable in the 5.0 to 5.4% range. When purchased I wanted to mitigate reinvestment risk, and to take the decision making out of my hands with that particular amount of monies.

      2. Nice and complete – some very good commentary there too. Like you, I’m not convinced there’s much higher in the markets to go. I do have some “too big to fail” bank corporates (JPM, GS) so I’m good there and am also looking at non-banks.

        I like your comment “happy to be looking at 5%…rather than 0.5%”. I forget that the ones I have maturing in the next 30 days have yielded 4.6-4.9% since these were mainly my first tranche into treasuries back in early ’23. Even a roll into treasuries now would produce more income.

      3. > I am looking at utes, non-K-1 MLPs

        I don’t believe there is such a thing as a non-K-1 MLP. If it’s not issuing partnership return info it’s going to be a C corp and not an MLP. Right?

        1. “I don’t believe there is such a thing as a non-K-1 MLP….Right?”

          Short answer – wrong . ( *See below. ) More nuanced answer, Right. I should have taken the time to write something like “non K-1 issuing pipeline companies. ” Like Enbridge or Williams.

          * I was thinking here of Hess Midstream LP , HESM, which is named like it should be K-1 issuing MLP, which it once was, but is now no longer taxed like a partnership since it elected to be taxed as a corporation around 2019. As I read HESM paperwork, HESM’s legal structure is still a limited partnership entity. That didn’t change because of the tax election. Only the entity’s treatment for federal tax purposes changed.

          So even though my writing was sloppy, HESM is a technically a non K-1 issuing partnership. (Of course, I know nothing about taxes and I could be and likely am wrong. )

          IMHO, HESM is an interesting high-yield investment. It has a stable cash flow and likes to increase its dividends. It is complicated to understand because of its relationship to its corporate parent (which uses it as a financing vehicle to fund its international business) , its periodic secondaries, a pending merger bid for the parent and parent-leval geopolitics in Guyana and Venezuela. Buyer beware – If you are used to the safety of preferreds and the stability of CDs and Treasuries, the daily volatility of energy related stocks can be very unnerving. Very much DYODD. Long: HESM

      4. BearNJ
        I am down to one MLP that issues a “real” k-1 (EPD) that I have to deal with at tax time.

        If you watch the MLP preferreds, most of them issue a very simple k-1 (one line entry) for guaranteed payment for use of capital. You still have to put it on your tax return (unless you hold in a non-taxable account like an IRA), but no more complex than entering a 1099-div. I have some in my taxable accounts, and a bunch in IRAs (they don’t throw off UBTI either, so no problem in an IRA).

        1. My wife had UBTI from EPD when she sold it from her IRA in 2021. They considered Capital Gains and Net Gain 4797 as UBTI and it was over the dreaded $1,000 limit. My IRA custodian filled out 6 tax schedules for the 990T and charged me $300. We quit putting MLP’s into our IRA’s.

          1. That is unfortunate, Steve.

            I only have one MLP (EPD) left in my taxable account. K-1 is a minor annoyance, but I don’t want to deal with recapture so I just let it sit and I collect the distributions. (about 7.6%).

            I have one MLP in an inherited account. It doesn’t throw off enough ubti to be a problem each year, and I have been selling it off slowly trying not to trip over the $1K annual allowance.

            1. Private, your post implied that your inherited MLP is in a IRA ( or ROTH ), as you have to consider UBTI.
              I have an MLP, (EPD) in my ROTH that was bought 2 years ago, presently a little underwater. I was thinking about transferring the shares out into a taxable brokerage account. Both ROTH and Taxable are with the same broker.
              My ROTH is more than 5 years old, and I am in my early 70’s – there should be no penalties for transferring out, correct?
              Would this be a good way to avoid the recapture & UBTI issues, but of course will need to include the K-1 in tax returns from then on.
              What do you think?

              1. Suggest you call your broker to discuss this strategy. That “transfer” may be treated as a sale within the IRA/Roth and a purchase of a new position by the taxable brokerage.

                More importantly from a K-1 perspective, the fear would be the partnership will record this as a sale by the IRA and if there is UBTI recapture to be triggered, this will trigger it.

                Not tax advise…..tread carefully.

                Not tax advise….seek advise from your CPA if you desire to pursue.

            2. Private,
              Have you had MLP preferreds in your taxable account? I have kept them in tax deferred accounts since most do not have UBTI, but I read on another site that ET-I might have UBTI. I am looking at ET-I and wondering where best to hold it. Thanks for any insight!

              There are two scenarios when an MLP can generate income subject to UBIT. On an annual basis, the
              income from the MLP’s main business, such as the transportation of refined products or natural gas, is
              usually subject to the tax. However, investment income earned by the MLP such as interest and
              dividends is exempt from UBIT. The amount subject to the UBIT is reported on the partnership K-1 (on
              line 20V) and is often a relatively small amount. Most MLP investors who have a small investment in just
              one MLP typically do not have enough of this income to trigger the tax, although that is not always the
              case.
              https://content.rwbaird.com/RWB/Content/PDF/Help/Taxation-Master-Limited-Partnerships-FAQs.pdf

            3. Private (or anyone), Can you provide the strategy you are using to sell the MLPs in the IRA without triggering UBTI.

              We both have EPD in Roth, since 2015 and with the 2023 K1, the Capital Account is fairly low. I went back and added all the distributions of EPD in my Roth since we owned it and EPD K1 provides the Cumulative Passive Losses.

              I worked on my 2023 tax return with MMP sale and the Cumulative passive losses absorbed about 50% of the ordinary income stated on the K1.

              We got caught with MMP in a Roth so Vanguard will handle that and it is what it is but want to start selling off EPD for both of us and add to the taxable account where my basis is almost 0.

              I couldn’t find the discussions of MMP sale.

              1. Hi Barb,
                I got some MLP shares in an inherited IRA account.

                what I did was to sell off some shares each year – but I would make sure that the recapture amount (which is taxed as UBTI) stayed below the $1000/year UBTI exemption for the account. I got rid of anything else out of the account that could possibly have generated UBTI and just rode it out.

                Took me a bunch of years, but I sold the last lot in January. I always sold early in the year to help minimize distributions (so as not to dig the recapture hole any deeper).

                Not saying that is what you should do (I don’t give tax advice), but it is what I did.

        2. Thanks for the info. I will move MLP preferreds from my Do Not Call list to my “maybe not so bad” list.

          I owned some regular LP issues, not preferred. I concluded they were not worth the trouble. These issues would often throw a curve ball for some minor 5 or 10 dollar item that did not fit neatly into Turbo-tax. They also dependably generated late tax forms or sent corrected tax forms for very minor items after I filed or after April 15. (At one point for about a dollar to my benefit.) They taught me a lesson about the difference between “tax-deferred” and “tax exempt” when a roll-up of an LP by its parent delivered an unexpected tax bill. Like the song lyric goes – ” They tried to make me go to Rehab, but I said no, no, no.”

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