The 10 year Treasury moved up over 4% yesterday and is now trading around 4.02% and the damage sustained by income issues has been very modest – in fact whether the minor damage incurred yesterday was because of interest rates or because of the solid pull back in all equity markets. We all know that it isn’t necessarily the direction of movements in stocks and bonds that can cause pain, but the speed in which those changes occur. We have been lucky so far as income investors to only suffer very minor damage to our capital–we are talking a few 1/10%ths.
I am certain I will commit a bit of capital to preferreds or baby bonds this week–what it will be I don’t know, but with lots of CDs maturing I won’t be recommitting all the proceeds back into CDs @ 4.6%. Also money markets continue their slow drift lower in yield–now at 4.99% on the Gabelli AAA Treasury (GABXX) which is the money market fund I use at eTrade–actually this rate isn’t bad, but given the daily drift lower the longer term outlook is somewhat bleak.
We now have hurricane Milton bearing down on Florida–a very scary situation. I don’t really know what effect this will have on markets–I haven’t studied that situation, but we do know that the Federal government will use the opportunity to spend billions that they don’t have–never miss a good opportunity to spend. Obviously as a country we have to spend on these situations, but if this was our home business we would have to cut elsewhere–no chance the Federal government will change their spending ways.
Markets are up modestly this morning–no follow through to the 1% fall yesterday, but where the day ends no one knows. I’m going to review BDC baby bonds and mREIT preferreds closely today as that is likely where I will buy this week.
Just to share, One account is up the past couple days and several others that include bond holdings and preferred are down. One as much as .5% from Friday and Monday’s sell off. Lot’s of red, mostly a few pennies to 10 or 15 cents. The real damage came from just a few preferred. Both low volume and yielding 5.5 to 6% One is PCG PRA that I have an average cost of $20.15 and Yield on cost (YOC) of about 7.4%
So income is not affected, but unrealized capital gains there has been some loss.
The market can change quickly, especially with just a few taps on a keyboard.
What side of the wager is going to win? Something to think about. Are we going to have rates higher for longer or are they going to continue to go lower? Short term could go lower but long term? What is the market thinking?
I share your questions. First, I would acknowledge that historic patterns and rules of thumb may be of limited value because today’s economy is different based on different demographics, outsized deficits and debt, deglobalization, etc. That said, I come back to two rules of thumb: normal spreads between the ten year and inflation of 100-200 basis points and an upward sloping yield curve of 100 points. I doubt that long term inflation expectations get below 2% or that the real rate will get below 150 bps. Similarly, the Fed would have to cut its rate below 3% to draw the ten year much below 4%? I expect the ten year to fall not much lower than 3.5% with a substantial chance that inflation will start to re-establish the 3-4% range within 2-3 years. I have sold all my floaters and short call F/F’s but I am building up some F/F’s that are callable after ‘27 to hedge my fixed rate preferreds with discounts, I am willing to sacrifice discounts by buying extended F/F’s at or slightly above par like MS-K.
Potter, I feel safe with the same strategy it sounds like you’re doing. Watching but not pulling the trigger on selling floaters that are floating now and may reset lower. Not interested in anything with 3 months SOFR plus unless it’s a higher plus adder. I’m happy paying close to par now for a fixed rate with 5yr reset 1 to 5yrs out.
Charles M
I’m in the same boat as you. My recognized gains are dwindling.
Until last week, I haven’t seen red in my accounts for a year.
It seems the markets think inflation isn’t crying Uncle just yet.
Maybe that’s why there was selling in Pref issues.
To those in Miltons way, stay safe
I compare my investing process to a slick, greasy used car salesman. Not referring to Rida… 😄 When you buy a car, the salesperson doesn’t want you to focus on the total purchase price. Instead, they want you to think about the monthly payment and what you can afford each month.
Similarly, as investors, we should ask ourselves what we want to receive as payment on a regular basis, whether it’s monthly, quarterly, or semi-annual payments of interest or dividends. The fluctuations in our investment’s unrealized gains or losses don’t matter much beyond the color on some investment screen. Do I have investments that are red? Yes. But they are sound and paying me. What truly matters is the recurring check coming in. If you’ve made a sound investment, then all you need to think about is how to spend that check.
For instance, yesterday, I ordered a fully loaded Toyota Rav4 hybrid with all the bells and whistles. It should arrive in a couple of weeks. This way, I’m focusing on the income and enjoying life by spending it.
I disagree – what matters is after tax total return. Don’t let the income tail wag the total return dog.
I think it depends on where you are in your journey. For me, on the brink of retirement, income is most important. Capital gains would be OK, but I’m hoping not to have to sell anything — or at any rate, to keep sales to a minimum and just collect dividends and interest.
I kind of play the middle ground, if that’s possible. Love the income from all sources but I do pay attention to capital gains and net worth. As I’ve said before, I’m surely not tax efficient but I’m okay with that as there are not many options with the way I manage my (non-qualified) accounts and it would cost a lot to make wholesale changes.
I have heard that before, but what is your reasoning? I would think retirement age investors would have ample reason to avoid additional taxable income because of RMDs, Social Security taxation, Medicare IRMAA, maturing annuities, maturing I bonds, Roth conversion opportunities, etc. And of course if you intend to leave money to heirs, basis stepup on death is a great reason to favor capital gains over income.
I’m 58, have a good job, no Social Security, no RMDs, no annuities, no heirs, no Medicare, and no Roth conversions. At some point those things will matter, but not right now. With capital gains you need to let them ride, and if the market tanks what have you gained unless you sold? As I said, what I do is not tax efficient but I build wealth slowly over time. There is more than one way to skin a cat.
If you look closely, you’ll see I was replying to Nimzo, who is “on the brink of retirement”.
Oops! My bad David.
David: Investment income is welcome not only because I will no longer have a steady paycheck when I retire but also because I have financial obligations to both older and younger family members. The lower tax rate on qualified dividend income helps a lot.
On the hurricane, it usually works to buy LOW and HD into the hurricane , then sell and short as they hit. Both are running and I’m just short a small amount of each.