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Mild Reaction to Debt Downgrade

Thus far the market reaction to the downgrade of U.S debt by Fitch has been very mild. Of course the debt was already downgraded by S&P 12 years ago so Fitch is just matching S&P with their lowered rating. Does this all really matter? I don’t think it really matters in the short term – it is the 1st move to even lower credit ratings and of course it is just the 1st stop on the way to junk status–the only question is whether it takes 10 years or 30 years.

Just like yesterday the equity market futures are a bit soft – down 1/2% on the S&P500. Yesterday the soft start to the day was mostly erased – sloshing money around the globe keeps buying. No one is forecasting a move lower in equity prices- former bears are uniformly turning bullish – what could go wrong here?

Interest rates popped back above 4% yesterday and they are holding above 4% this morning. I guess we will see increased competition for investment money all around the globe so no need to realistically think rates are going down much anytime soon.

I had high hopes for increased CD rates after the Fed Funds rate increase last week–but alas the bankers must feel a good comfort level with their deposit levels, because while they raised their ‘prime’ rates immediately they are ‘giving us the finger’ on higher CD rates. Oh well I will continue to watch rates and make decisions each month whether to buy CDs or go elsewhere.

Yesterday I entered 2 good til cancelled sell orders on some of my bank preferred holdings and these orders remain open yet this morning. As you all know these thinly traded issues have wide spreads so a bit of patience is required to sell at a decent price. These 2 sales are not because of any problems with these 2 bankers – just locking down some very nice gains. I’ll list the sales here if they happen.

We have most of the bank earnings in for the quarter and generally they have been decent – below a year ago, but not significantly lower. Now we will see insurance company earnings with Jackson Financial (JXN) next Tuesday and Lincoln National (LNC) reports today. Both of these will be interesting reports as both company’s are in recovery mode from bad reports in recent quarters–and of course both have high yield preferreds outstanding.

21 thoughts on “Mild Reaction to Debt Downgrade”

  1. Tassel earrings will be the epitome of fun, and these multi-colored ones are pure pleasure! They’re like wearable confetti, and I can’t help but smile when I discover them.|


  2. Call me crazy, after much thought I picked up another insurer today. The Kemper notes KMPB at 17.25 for an 8% yield.
    Almost all the insurers seem to be doing badly just pull the least bad ones from the pile

    1. Charles, I cant call you crazy. I picked up a full position of it a week or two ago at about the same price averaged in. If the P&C business stabilizes and returns to profitability after the recent rate jacks, this is a win win scenerio purchase. That 4.14% reset in 2027 is basically a 6% adjustment at our purchase price. The plus 8% is nice now. But at reset if 5 year is just 2.5% then, one is still looking at well over 9% at reset.

      1. What makes this KMPB issue interesting in a way is that you have protection vs changing interest rates in either direction. if rates go higher, you get the floating rate advantage of getting a higher coupon upon reset…. If rates go lower, you own a debenture at a substantial discount to par that has appreciation potential to move higher with lower rates, That’s magnified by the substantial cushion you have that your coupon will end up going up in ’27, not down, even if rates slide substantially……. Why it’s enough to make even me, with my long standing long duration phobia, interested…..

        So would you think there’s a comparison to be made between KMPB’s market characteristics to ENB’s EBGEF reset right now? KMPB has a far better reset rate, of course, but EBGEF should be approaching a short term pricing impact due to reset being only 7 months away. Yes? and yes, I’ve held this one thru everything from way back when of the EBBNF v EBGEF debate… ha. one of my long duration phobia exceptions..

        1. 2WR, I cant remember the terms of the Enbridge resets, as I havent been in them in a while. Last fall or so I owned one that got confused with the one that got redeemed and I sold it when it went up several dollars in a few days….But I bet you remember all the terms! Im proud of you that you are pushing your safety barriers out wider and considering other options, ha. While keeping in mind my biggest allocation now is CDs so who am I to tease?

          1. Ha EBGEF resets 3/1/24 @ 5 yr USTreas + 2.82. It’s a little bit lite on the plus number relative to EBBNF which is + 3.15, but the important thing now is the timing of the reset. EBBNF reset on 9/1/22 and will be 5.8579% until 9/1/27. EBGEF is currently 5.3753% but will if it were to reset today instead of 7 months from now, it would reset at 6.961% . Last trade on EBGEF = 20.125. There’s also the third USD denominated EBBGF which just reset on 6/1/23 to 6.7037% and will remain at that until 6/1/28. With EBBGF last trade at 20.85, it looks the cheapest of the three to me right now, but I’m in all three to varying degrees… All three are IG and EBBGF has current yield now of over 8%, locked in until 6/1/28. Naturally anyone should check TSX.com for the CDN equivalents if monitoring these. And of course, ENB also has a slew of CDN denominated resets as well and they are probably dragging down the USD issues price wise right now.

            1. 2WR, Picked up more EBBGF at 18.67 today for ~9%. Someone must have panicked and dumped a bunch.

                1. ha, I noticed my long standing GTC order is in a few pennies below this level, probably unadjusted for the increasing amount of accrued…. guess I’ll just wait it out but nice purchases!

                  1. oof.

                    “By proceeding with this order, I agree to the Foreign Settlement Fee of $50 in addition to the regular commission that will be charged upon execution of this trade as listed in the fee section of our website.”

                    I assume all the buyers of EBBGF do not get hit by this and it is another example of Ally sucking? I was curious what you were talking about and I assumed it was Canadian and not a MLP.

                    1. Just speaking for TDA, they don’t charge a fee.

                      2WR, Might want to check to see if your GTC order hit now, price keeps falling

                    2. yup, pig – 100 share marker bid in at 18.62 got hit…. Interesting to see that on tsx.com, it closed at 18.65 and there were no trades at that 18.55 level where 100 traded near close on US market.

                    3. This $50 fee is hit or miss apparently and I think it’s been discussed before… No fee at Fido either however sometimes they have screwed up and charged it…. There’s a description of when the $50 fee is to be charged on Fidelity and it essentially applies to symbols ending in F that are for companies emanating in countries without tax treaties with the US… You might find out if that’s the case at Ally and then argue to get it refunded..

  3. Speaking of insurance, Allstate’s earnings were poor. Half expected to see ALL-B called today(8.4% annual dividend). Nothing yet.

    1. Steve, who is expecting it to be called? Or are you just referring fellow members here? Math wise, I dont see it being redeemed here. They just issued a plus 7% perpetual, so that cost of capital is more than a 8.5% subordinated note. And they both are generally viewed as 50% equity/50% debt credit. The only real way they could save money is to issue more senior unsecured and that typically isnt done. The beauty of it if you will, is the market generally prices it in a manner that you really cant lose much money if wrong and they do redeem for whatever reason. The relative low adjustment rate keeps likelihood of it staying outstanding more probable. They have a $1000 adjustable note past call and it hasnt been redeemed either.

      1. Though not an insurance company, the most interesting to be watching for right now regarding a probably call is WFC-Q. It’s callable on 40 days notice but only in dividend payment dates, AND it requires approval of The Federal Reserve Board to be called. With next div date of 9/15 being first optional call date, and with this 5.85% issue turning into am 8.94% FIXED rate if it is not called, it will be interesting to see if there’s any blowback from Fed that might prevent them from calling…. Not entirely certain of the day math, but I think 40 days notice means notice has to be given no later than Monday, 8/7 at the very latest. If no notice, WFC-Q 8.94% coupon payment will be good for at least one payment on 12/15.

        1. Awesome thanks for the 8/7 date. Thought I would have to wait until 9-15 to know whether it is to be called. This is the one issue, I currently have above my normal full position. I have it as 125% of a full position since I purchased it earlier this year at 2% below PAR.

      2. I recently purchased it with the belief that it would be called. My view was they would use the proceeds from the 7.375% fixed rate issue. Although, I was puzzled why they didn’t do this in May 2023. I guess your analysis of the cost of capital is correct. I appreciate your looking at it and sharing your analysis. This is my real reason for posting it – to get other’s views on whether it’s likely to be called.

        I will be extremely happy if it is not called. It is trading close to par when you consider the next ex-date would be Sept 30th (payment date 10-15). My Schwab account is showing earliest call date is August 31st.

  4. Tim, it looks to me like the bigger reaction has come from the Treasury announcement that it will seek $1T in 3Q bond sales. No mention of “crowding out” yet from $2T deficits.

    1. The Treasury announcement is obviously a huge number, but only slightly more than had been expected. Still, combine that announcemnt with the fact that (1) QT is back in action–the Fed balance sheet went up about $400 billion after the regional banking crisis in March, but is now below levels of early March and Powell seems to be sticking to reducing the balance sheet by $100 billion per month, and (2) foreign bond demand may be dropping, particularly with Japanese bonds perhaps becoming more attractive and less buying from China. Eventually, that pressure adds up.

  5. As for JXN, I went for the common instead of the preferred. Yield is about the same and even the newer lowered earnings were more than sufficient to cover.

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