Wow this market (both stock and bond) was totally slammed today. The 10 year treasury racing ahead by about 10 basis points to 2.03%—way too fast for my comfort.
A little bit of heat in the CPI could have been tolerated but a month over month increase of .6% is the absolute worst news imaginable. While the year over year number was just slightly warm, the month over month suggests no lessening of inflation.
Today preferreds and baby bonds were hammered fairly hard–on the week the average issue is off around 1%–of course some are off much worse than others.
There have some issues that have been knocked down very hard that I would have guess would have held up better. For instance the Arbor Realty Trust issues were slapped down again today by 2%. They have 3 issues outstanding and 2 of the 3 fell to $22.50 and $22.90 respectively, which puts the current yield near 7%. Disclosure I own some Arbor Realty Trust preferreds. For some new investments in perpetuals I would think one would want to target mid quality issues at 7% or higher.
For now I keep watching the short maturity issues–baby bonds and term preferreds which can be seen here. These issues have held up well compared to the perpetual preferreds, although they are off their highs. I won a fair number of these issues–in fact probably 80% of what I own can be found on this page.
FYI, From Ed Yardeni. Beware Valentines Day Massacre
YARDENI RESEARCH (#edyardeni on the #Fed). Happy Saint Valentine’s Day tomorrow. Enjoy it with your significant other. Let’s hope that the Fed doesn’t spoil the day with an emergency rate hike.
I know that sounds crazy. But why, pray tell, did the Board of Governors of the Federal Reserve System announce on Thursday, February 10, that it would meet on Monday, February 14, at 11:30 a.m. to review and discuss “the advance and discount rates to be charged by the Federal Reserve Banks.” The meeting “will be held under expedited procedures” and the “matters considered” will be posted on the Fed’s website after the meeting. I hope the result isn’t a Saint Valentine’s Day Massacre.
I’m still expecting a 50bps rate hike at the March 15-16 meeting of the FOMC. But I’m hard pressed to figure out why the Board of Governors (not the FOMC) is having an emergency meeting.
Perhaps, Fed Chair Jerome Powell has concluded that the Fed is so far behind the inflation curve that the Fed must move faster to tighten. The spread between the federal funds rate and the y/y CPI inflation rate is the most negative it has been on record, even more so than during the Great Inflation of the 1970s, when it was mostly negative during the entire decade.
lucky: On balance a reliable place if IG and cumulative in my book. Look at VNO-O at $20., 5.xx% place to wait and collect. If recession in next five years sell, if reset it will roll with the times of that snapshot, if called whoohoo.
I have a spread of instruments to respond to any situation and stay fully invested depending on the opps. I’m only trying to get to the end of days with my butt in my own hands. Know your goal.
Good to think out this process. A will add that term maturity is a real consideration for a large slice too since. I scoped out some of the near in term CEFs too this last week, but in general they are full of junkier, tho close in instruments. Liquidity for the pros. Been horrible compounders and may be the case for fixed income from now on out versus inflation in a competitive, indebted world. Gotta go to the CEF home pages and quarterly disclosure docs to see what is held. IF you have a GREAT insight to the holdings there , PLEASE let me know. Packaged tranches has been a dicey game for the public, so buy at a very low price in my reckoning, who cares what the discount is.
Bot four trading issues this last week, no commons. Rolled in all options on those commons in to Feb 18 next week. None look to be exercised.
In my opinion, there is a big slosh into Energy now that everyone’s eyes are open to the details and looking at the same data. The down move in general market is prob close, the brave have made their move. Cash seems to be a very impatient game because of decades of conditioning and inflation scare. Stare down Fear.
Blaise Pascal inverted paraphrase: “To avoid the ills of men, make your decisions in the quiet of a room, removed from all distraction.”
Weekend Pause Button, JA
All Ways the Best to the III Clan! I have appreciated your contacts.
Joel, VNO-O appears to be a fixed rate rather than fix/float, so I don’t see how it can have a reset. If recession causes rates to be lower than when it was issued, and credit spreads don’t widen too much, and Voronado is able to maintain the same credit rating, they will try to issue a lower coupon preferred and use the money to call series O. That’s when you get your 20% bonus. Why sell? The high yield on cef’s is tempting. I always check to see erosion of NAV over the life of the fund to get an idea how much of that tempting “yield” is really return of capital.
Dhope, It’s also not IG! I had so much research stuff floating around over the last few days that it all got mixed. Well anyway, the conversion to F to Fl may be a future consideration. I noticed it went WAAY down near $20 and that it was a recent issue.
Never promoting or giving a pointer to a good position. I am more interested i n the general framework of thought and consideration behind a buy or eventual liquidation.
All the BEST!
https://schrts.co/ymRxNSQi
Yield curve – is this ‘99 all over again. The fed will start a hiking campaign with this flat of a curve. What could possibly go wrong. Inflation is hot but don’t pop the balloon. The fed always makes a policy error. I don’t think this time will be any different.
Like most mass media talking heads I don’t carry the burden of having to be credible so I’ll make my outlier prediction. The invasion of Ukraine+Bird Flu+ Resurgence of Omicron because of the usual incompetence and dropping of the mask mandate = No rate hike in March and a 30 minute news conference with 20 minutes of double talk and questioning by people who are an embarrassment to what journalism used to be.
Tim,
I don’t know if its possable but if it could be done on the short -maturity preferred’s. A column that lets us know if it is IG or not I think be helpful.
Thx
The fed being late off the gas, leading to hard on the brakes, could easily put the economy in recession, as others have mentioned. Buying the low coupon issues at a steep discount can provide both a competitive current yield, and a nice premium to your basis if rates plummet again with a recession, and they are eventually called. Why worry about higher coupon future issues that are most likely to get called first and offer little or no premium if called? Generally, the low coupon issues will trade at a slightly lower current yield to allow for this, and, yes, they have more convexity, but the higher yield to call seems worth it to me.
Lucky, Powell is trying through all means necessary to drive down consumer demand for goods and services since 3 million former workers are not returning to the workforce. The result is higher wages and higher inflation. Thus cutting demand especially by upper income families who buy a huge share of non essentials is Powell’s mandate to lower inflation. Supply chains are not coming back so demand has to significantly fall to ease inflation. Upper income families wealth effect is often influenced by their stock portfolios, retirement accounts and home prices. Home prices may not fall due right away until demand falls off. Stock prices need to fall and buying the dip has to fail before the upper income consumers stop spending. The breadwinners in a family have to slam on the brakes to non essential spending for this inflation to ease thus allowing Powell to reduce the rhetoric and policies to lower the market.
I think it is time to go to confessional. I am betting that nearly every III’er thought the UST 10 year would get >=2.00%, so I don’t think anyone was surprised. Yes, it is painful, but we had a clear view of the brick wall we were headed for. The question is how high will it go? Everybody has their own opinion and can take the appropriate action or inaction. If you think it will get to say 2.5% or 3.0% or greater, then you should expect preferreds and COMMONS to fall a lot more. OTOH, if you think ~ 2.0% is the end of the rise, you can comfortably sit tight and in aggregate the pain should not be too bad.
One thought for you to consider. If you hold any “liquid” preferred that has NOT fallen somewhat, you have to ask yourself why? In a perfect world, everyone would have a model for every preferred they hold that forecasts how much is should be down. Even higher coupon preferreds SHOULD fall somewhat, just not as much as lower coupon issues. Note the Grid’s “Illiquid” issues that rarely trade might not fall at all, i.e. they don’t necessarily pay attention to any modeled behavior.
For the issues we hold, as you might expect, some are underperforming and others are outperforming. Our cash returning ~0.0000% is outperforming.
7-7.5% return or start shopping for alpo or Breakfast cereal for your 3 meals a day.
Tex, My theory is when illiquids pay noticeably less than liquids you get out. They arent gravity defyers but they do one thing liquids dont give you…Time to survey the scene and get out, which I did except for just a couple which Im keeping. I just dont see value in an illiquid 100 bps lower in yield with near same credit quality.
There are several liquids with lower prices now when they were issued with 10 year higher than it yields today…Value or value trap? It goes back to your assumptions statement you stated. I only own a couple true fixed perpetuals, and am only interested in one other. I snagged only 155 shares of it, but I want 500 so I will go fishing again tomm!
I have learned investors always over react in both directions. That the news cycle combined with human emotion always causes these conversations to pop up and people attempt to out do each other with bigger and bolder claims. I highly doubt we will see 7-8% 30 year mortgages again. I doubt we will see an IG bank have to issue a 6.5% preferred this cycle. I do not think any of these scarier predictions will come true. Inflation will be defeated with a recession. That is where I think we are headed. Not stagflation. I think businesses will reduce hiring. Not hire more. They will figure out a way to avoid doing that as a whole. An example is reduced hours of operation which I am seeing more and more of. Weak locations closing completely. Closing one day a week.
The fed has not even raised rates yet and already the reaction is taking place. The fed can hike 10 times and the 10 yr might not react the way we think. Might just scratch 3% before recession hits causing them to cut it again. Which will cause the 10 year to drop like a rock once again.
This is how I think it will play out. Those 4.5% preferred getting hammered down to 21 will be back at 25 in just a few years time. I realize some people need to spend the income but those of us who don’t can simply use divs and interest to buy anything new/interesting coming out. Fresh/sidelined cash can be put to work. If you can get something new and half way decent IG paying 5.5-6% jump on it hard as soon as the opportunity arises. That is as bad as I imagine it will get. Naturally they will be the first to be called next cycle down leaving us those 4.5% to dork around with.
Fc, Are we brothers from another mother? You are correct historically the reaction takes place first. The 2013 taper, the perpetuals were blown out before the Fed even got off zero. By time they got around to act, the 10 year was slipping and preferreds were recovering. History usually just rhymes, though. We have more inflation, and the worst investment known to man kind, PFF only dropped 1.36% today. So they still may have to blow some issues out from redemptions yet. PFF is at 52 week low but it surely has more pain left if market stays scared.
Even though inflation is 7%, there is no 7% IG perpetual issue calvary coming to the rescue. Still there are other avenues, I believe that can work.
Grid:
PFF is down 15M shares so far in 2022 – about $550 million in outflows. The fund has lost 8% already in 2022, so it has been a disaster for anyone holding onto it this year. That is a big move down.
Big differences between 2013 tapering and today. The Fed is tapering (and may soon be selling some of its near $9 Trillion portfolio), will be hiking rates (maybe even aggressively), and inflation is at 40-year highs.
There aren’t many of us on this site who have been through an environment with this type of triple-whammy. I am going very, very slow on the buying of IG issues. Whereas I often buy 100 or 200 shares at a time, now I am buying 10 or 20 shares. It will hurt any chances for decent trading gains on quick bounce-backs, but so be it.
Thank goodness for zero commissions!
Grid,
No telling what the future may bring. Inflation is here true, but how much of it is real and how much is just manipulation? business taking advantage to raise prices. Just 2yrs ago We got NYCB-U around 43.00 and its now 4.00 off its highs yet the NYCB-PA is only about 3.00 off. There is more pain to be had in the preferred’s. Except for oil, I see prices in Steel, Copper, Lead, lumber leveling off the last 5 months. My company is late to the party and pushing to raise prices now, that works until the competition starts lowering their’s. What a Merry go Round. I think there will be one or two shocks to the market this year driving it down like say start of a war in Ukraine. Went on a road trip to Portland a week ago and the freeways and hotels were almost full and so were the popular restaurants. Gas was almost a 1.00 lower in Oregon and they had enough people working to still pump it for you.
Charles, adding to “late to the party”, many union contracts have a cost of living annual escalator. Some contracts run 4-5 years. Those 2-3% fixed colas wont work come contract renewal time.
We can talk credit spreads, 10 year yield, 2-10 spreads, inflation, etc., but there is one other variable that often rears its head from being ingrained in above.
Due to their cap structure, perpetual preferreds tend to act like bonds when you want them to act like stocks, and then they tend to act like stocks when you want them to act like bonds.
Grid – your last sentence is spot on. What is the minimum spread between 10 year and preferred you require now depending on whether IG or junk issues. I expect volatility to increase through fed meeting and invasion of Ukraine. Patience is required right now. ATB
Tim, its like I own two different universe of preferreds. Ones that are not largely budging at all (mostly non Mreit adjustables, term dated, and fixed above market rate past call issue) and the perpetuals I have been able to average down while trading on bumps (that cushion was about wiped away thanks to Friday, lol).
I need to prune some of the stable above par issues, to raise cash. As these have no upside to them anyways and I can get back in them with relative ease anyways. And then use these dollars to hope for some more fixed perpetual carnage below par. 6% IG below par would be sweet to my ears no matter what the spreads are. I think in time that would hold up reasonably over time. It would be nice to get a scenario where the IGs crash enough, to off load the higher risk ones and not lose much spread to be ready for a recession as that is when the higher yield junk issues get pummeled.
Are most Gridbird trades decided in the final minute — like the Cardiac Cards?
FC, as quick as the 1975 Mel Gray “phantom TD catch” that left the Redskins cheated out of a victory!
https://www.youtube.com/watch?v=2VKcuT6TBjg
Do you play dirty — leg whip, eye gouge, and bite fingers to protect your profits?
Grid – thanks for replying. As for a recession – keep your eye on yield curve inversion – credit spreads increasing – unemployment rate rising – LEI going negative. Outside of pandemics this should give us ample warnings. ATB
I am 73 and about 6 months from retirement. This opportunity to buy decent issues at lower prices comes at a good time. I look at it as buying an annuity, not much different than handing over your money to an insurance company and getting 6-7 % for the rest of my life for a perpetual issue. Sure the prices will go up and down, who cares as long as the income arrives in the account on time as I am wanting only income,not capital gains. At least with higher rates there will not be a wholesale calling away if issues like we have endured in the last two years.
Gee, Bill, I feel almost exactly the same as you, except I’ve been retired over 25 years now. And most of my investment income comes from quality MLPs and is largely tax-deferred.
Both EPD and MMP, two of my largest holdings, have raised their distributions every year for over 20 years and have bought me a lot of good wine. I’ve never sold a single unit of either. You might want to check them out. Either way, good luck in your coming retirement. Mine has been better than I ever dreamed.
JMO
I’m about 3 years behind you, Bill. Income at a nice entry price is the goal for most of our new money now.
Our fixed income portfolio was in a nice IG corporate bond ladder until the 10yr Treasury dropped under 2%. I’ve liquidated out of the long end of the bond ladder, parking some of the money in the IG FtF pfd pond with 4% floors. Thanks for the lists, Tim.
We’ve been waiting for the PFF to bottom out as a signal to load up on IG bank & insurance perpetual pfds. That could take quite a while but the market declines are eating future coupon payments like crazy. The income market seems like an old school load mutual fund; a couple percent get clipped off the top of any new money going in.
It is very curious that the Fed has bought up so much of the TIPS market. As the party with the most control over rates, are they hedging against an inflation blowout?
We’ve also been shopping hard in the oil patch infrastructure. So thanks for the ideas, camroc. With gas prices way up, it might be the only capital preservation + income play out there.
Camroc, I have heard some MLP’s were good income generators. My portfolio is mostly in a traditional IRA and my 401K will be rolled into it when I retire as well. I have heard K1 tax forms can be a bother, yet some say they are not a problem, but they can arrive late after April 15th causing one to file an amended return. Have you personally had any issues with K1’s ?
I own the ABR-F issue which closed at $24 today. I’m definitely carrying a loss, but I like this issue. 6.25% until 10/26 and then SOFR plus 544.2 BP with a minimum rate of 6.125%. It is perpetual, but offers a minimum yield I can accept.
I agree with you on the ABR-F, but went with the ABR-D issue as I can live with a 7% dividend for ever if need be. Don’t see the F issue ever reaching a 7% payout. Actually got it at the low of 22.90, we will see what the future brings
To quote Ron Burgundy — “that escalated quickly”.
https://memegenerator.net/instance/34981406/well-that-escalated-quickly-well-this-is-escalating-quickly
Tim , i would love to see Your ( or other contributors ) list of : ” The mid quality 7% and higher issues “. Much more interested in the future than in a short term hiding places. Thanks
Hi Nikolas–I will put something together–although we are still waiting for most of the 7% mid quality issues to come–but there are some available now.