I think the time has come—or maybe I’m just delusional—but I am looking at perpetual preferreds and longer-dated baby bonds for a buy next week.
After looking at all the data from the last number of weeks I have concluded that the Fed Funds rate will be cut 25 basis points in the next couple of months—AND that there is likely adequate demand out there (globally) for our government debt. We could well see a 25 basis point cut and then another pause for wait and see.
Employment, while near steady is weakening a bit over time–unemployment claims are rising. Inflation has remained steady to even a bit favorable in spite of the tariffs or tariff threats. GDP would appear likely to be in the green–how much as anyone’s guess (remember it was off -.2% in Q1). Housing is stalling out as units being built are starting to head lower. Seems like the economy is flat lining.
I have been moving into higher yields for the last few months from CDs and money markets–but only with term preferreds and short maturity baby bonds and plan to continue moving the portfolio yield higher—but now shifting to some quality perpetuals and longer dated quality baby bonds. We have numerous investment grade issues trading with current yields in the 7% area and that is what I am targeting for buys. I already own some of the issues in the table below, but may add to those or open a new position.
I have also been pondering adding to my CHS positions–I own the CHSCM and the CHSCN issues already and honestly am holding capital losses in both issues, but I have held these issues for years and total returns are positive. The biggest problem I have owning CHS now is we have no real clue how the company is performing and earnings won’t be out until the 2nd week in July.
So I will be shifting my direction—slowly–very slowly to adding some longer dated securities and positioning for some potential capital gains over the next 12 months.
My main problem with longer term baby bonds or perpetual preferreds is inflation and/or the depreciating value of the dollar. These types of investments would be great if you think long term rates will drop. But if rates hold steady or rise how do you combat the loss of value of the dollar you receive?
Tim ~ BNY Mellon approached Northern Trust for merger talks (WSJ)
Does the 199a tax break apply for REIT Preferreds? PSA-F
I am somewhat overweight in two of the CHS preferred. Not sure if I want to buy another tranche at least yet. My instincts are telling me the American farmer has hit a rough patch and CHS had lower earnings on their last report and I don’t think anything has changed so I have a feeling the July earnings release is going to be down. That would be the time to buy. But you will not collect the dividend and you have to hold another 3 months not knowing if things will get better or worse.
As an aside, driving I80 across to Sacramento I like looking at the changes in the farmland as I drive by. Seems like less Sunflowers are planted. Hard to say about the corn and tomatoes although fresh tomatoes were .79# for Roma which is the main crop for the Campbell processing plant.
Last 8 to 10 years there had been a lot of almond orchards planted but these take a lot of water. My opinion way too much has been planted. I saw the first olive orchard I have ever seen planted this far south in the valley. Traditionally most have been planted upper valley around Corning and Orleans. Once established they take less water.
Maybe time to invest in a olive company stock.
Sorry got sidetracked. I apologize to those III’ers if I offended anyone.
Still on the fence about more CHS
Hope they work. But I’m a yield ‘hog’ and can’t buy those coupon regardless of price/CY
CHSCN dipped in the last 10 minutes of market today. At one point, some shares traded at 52-week low – 24.37.
I have full positions in most, if not all of the issues listed above, in my wife’s retirement account. She has little to no interest in managing the portfolio and I believe these long dated investments will require little to no maintenance. And, because of the coupon rates have a low likelihood of being called. If called, most will provide a nice capital gain.
My primary focus is cash flow, so price fluctuations over time are not a concern. I have an objective of 6.5-7.0% annual return on cost. These issues are supplemented with etf’s such as PFFA, PFFD, JEPI, JEPQ and UTG.
I own UTG, it is a CEF.
You must be my investing twin. I own JEPI, JEPQ, QQQI, SPYI, GPIQ, GPIX, PFFA, SCHD in the ETF space. Of the issues listed above I own MGR, MGRB, NTRSO, RNR-F, WRB-E, CHSCL, CHSCN (added 50% to position today) and CHSCM. I’ve added plenty of other quality preferred and baby bond issues over the last several weeks. Have a strong portfolio of corporate bonds and a few CEF’s UTF, DNP, RFI, RMT, RNP. I’ve been waiting for UTG to come done. At my age it’s a cash flow centric portfolio.
I’m heavy into perpetuals and baby bonds. I suspect rates will go down maybe not for a few months but still a good deal. If rates don’t go down, then Shucks I’ll have to settle for 9% dividends. As long as no black swans cause defaults.
Baby bonds don’t move as much because of the early redemption date. I have a balance between steady babies and perpetuals with volatility for trading and some price upside.
I own RNR-F and just now, after reading, will be adding.
Have a question for all.
In past been reluctant to buy a very long to maturity baby bond. But in essense, it seems essentially the same as buying a perpetual preferred, except a bit higher up in the capital structure. I think my reluctance was simply that typically if I bought individual bonds I was usually willing and planning to hold till maturity. Ok so it comes down to this question, I think.
Which, (all other things being equal, e.g. yield, safety of issuer, etc), is more interest rate sensitive? A very long till maturity baby bond, or a perpetual preferred?
AI said perpetuals do, but wondering if correct.
And this is most likely the best time to suggest you get familiar with the concept of duration vs maturity – because it’s pretty difficult to answer your question without taking into account the coupon of the bond or preferreds you’re considering….. if that answer catches you by surprise, then I’d suggest a bit of wandering around Investopedia to grasp the concept.. to generalize, the lower the coupon on a long maturity or perpetual bond or preferred, the greater the sensitivity to the direction of interest rates.
Duration obviously. Interest rate sensitivity for bonds based on duration. But thought question and hypothetical clear, or as clear as I could present.
> Which, (all other things being equal, e.g. yield, safety of issuer, etc), is more interest rate sensitive? A very long till maturity baby bond, or a perpetual preferred?
The perpetual is more interest rate sensitive (or has a higher duration, to use the proper term).
Thank you.
Until somebody can show me data that baby bonds which have a shorter duration than preferreds (which are mostly perpetual except for term preferreds), I just cannot appreciate the reluctance to invest in baby bonds while at the same time buying perpetual preferreds. If somebody has data that shows perpetual preffereds on average are called sooner than baby bonds, I would love to see it.
> Until somebody can show me data that baby bonds which have a shorter duration than preferreds (which are mostly perpetual except for term preferreds), I just cannot appreciate the reluctance to invest in baby bonds while at the same time buying perpetual preferreds.
Sorry, is this sentence missing a word or a clause somewhere? I can’t understand what you’re trying to say.
Sorry. I am trying to say baby bonds have shorter durations than all preferreds except term preferreds. Preferreds have no maturity dates. Baby bonds do.
Lets talk about call dates. Both are generally not callable for 5 years. Are baby bonds average time between the issue date and the call date longer than preferreds? My contention is No. If somebody has data showing otherwise please share it.
I have yet to understand posters who say that are passing on a baby bond due to long maturity dates but happily buy preferred issues that actually have no maturity date.
“I have yet to understand posters who say that are passing on a baby bond due to long maturity dates but happily buy preferred issues that actually have no maturity date.”
Have alas come to agree. I now conceptually divide baby bonds into two categories. Short to intermediate term in which case I can view as I do my heretofore regular bonds with primary intention to hold to maturity. And for baby bonds of longer term, e.g. decades, I view and compare to perpetual preferreds, that are slightly higher on the company’s capital structure. Same logic also applicable to buying longer term regular bonds. I think this is the logical perspective and opens up more buying opportunities and diversification. Though would not pass up selling for cap gain, that is not reason for buying. Reason for buying, is safe cash flow. Cap gains is what I seek with my equity investments, not my preferreds and bonds. Making bets on interest rate movements beyond my capacity, but equity indexes over time am confident in growth. Just my viewpoint which seems to have worked well for me.
So to summarize, you compare short and intermediate baby bonds to short and intermediate heretofore regular bonds and baby bonds of longer term to longer term regular bonds. That’s logical since the only structural difference is what “par” amount is…. but to compare baby bonds with maturities to perpetual preferreds with the only difference being their improved position in the corporate stack, is an overstatement imho. Granted it is true that the further out you go in maturities the lesser the impact of duration on similar coupons, but there will always be a measurable difference vs perpetuals. And apologies, T, as I feel as if I may be coming across as picking on you. I don’t mean to be… Your point is well taken that the differences dwindle the further out you go.
I’m in the same camp as Tacitus and several other III’s. I am buying for the income for the most part. Unfortunately over the years I have found I have to actively manage the holdings. Not that I want to sell or trade but often I am forced to.
Things change for the issuer of the preferred or Baby bond and I don’t feel safe. They get called sooner than I expected and I have to look for replacements.
We have been talking about interest rates on here and wether we like it or not, this can force me to be a trader.
Last year I wasn’t looking at long maturity or perpetual preferreds because of their lower yields.
My options for safety and yield seems to be narrowing.
There are a few senior BBs that deserve special attention.
Thanks Rocks, have to do a little research.
> I have yet to understand posters who say that are passing on a baby bond due to long maturity dates but happily buy preferred issues that actually have no maturity date.
Oh, I see. I agree with you, that is logically inconsistent.
Multiple answers to you question.
1. If perpetuals pay more than baby bonds then that’s a good reason to choose them. Fixed rates are easy, floaters depend on how you want to play rate swings..
2. if perpetuals are a lot below par then they have potential upside for capital gains. Might not happen nobody knows but the possibility counts for something.
3. if you are a trader like me then perps are a lot more volatile than short term issues and that can create more profitable trading opps.
4. I don’t understand people who run scared of a call but think a redemption is a wonderful thing. They’re both ending your issue.
I have half positions in about all the ones on your top list and also do the capital one series in the 16s-18s. 20+ issues plus pffa, pfxf, and ldp bought in April. most of the capital has been recycled once since the 2023 bottom and I’ve managed to get 4/5th the performance of the equity index with 50/50 equity / fi, thanks in large part to what I’ve learned from this group over the last few years.
I’m at about half cash equivalent and half duration.
I like to think about what they have to pay me to take it away from me.
cheers and appreciate everyone on the site.