Whew! Last week was a bit wild and woolly, but we got through it as you all did and likely in fine style. Even though the 10 year treasury popped to end the week at the highest yield in 3 1/2 years at 2.95% most well positioned income portfolios suffered losses measured in $100’s not in $1,000’s. Anytime you can get through the week with tiny losses on a 14 basis point interest rate move higher you should count yourself fortunate.
So the 10 year treasury traded in a range of 2.81% to 2.95% ending the week at the high point. The higher rates can only be blamed on 2 things–a heightened fear of inflation and a bunch of yakking out of Fed presidents as they mainly talked hawkish relative to fed funds interest rate hikes through the balance of the year and in to 2019. Our suspicion is that we likely will see long rates temper a bit as the coming week wears on. As we all know it isn’t pure interest rate levels that are deadly to income investors it is the speed of the movement.
So for the coming week we have exactly ZERO Fed presidents scheduled to speak. We are always best to have no conflicting data spewing from their mouths since their economic guesses are no better than yours or mine.
We do have what I call minor data points being released this coming week. Monday we have the Purchasing Managers Index being released as well as Existing Home Sales. We see neither report being meaningful. Housing sales will be flattish as there is little to be bought as inventories remain extremely tight everywhere.
Tuesday brings bunches of housing information as the Case Schiller housing price index will be released. The Federal Housing Finance Agency will also release their housing price index. Both will likely continue to show continued movement higher in prices. Additionally New Homes Sales data will be released. As we see it buyers are chasing fewer available properties and driving prices up—with lenders such as Fannie Mae and Freddie Mac helping to fuel the fire of higher prices. Everyone talks affordable housing so they continue to lower credit standards and down payment requirements. Quasi government agencies compete against each other to see who can write the most risky loans–more and more conventional loans are being written with 3% down. To us a 3% down payment is equivalent to ZERO down–a job loss, divorce or medical emergency is plenty for these folks to fold their tents and walk away from the loans.
On Thursday we have the Durable Goods Orders for March being released and we expect it will be a meaningless report to the markets. Additionally both retail and wholesale inventories will be released–again not important.
Friday we have the 1st estimate for 1st quarter GDP and the expectation is for a modest 2% annual growth rate. Major surprises below 1.5% or above 2.5% could cause movements in interest rates and equity markets. We also have the Employment Cost Index being released and again this could cause movement if the number comes in hot with gains in wages and benefits–confirming potential inflationary times ahead.
Of course there are other economic reports all week long but in any given week there is little that is meaningful to day to day trading in equities and interest rates.
Relative to interest rates moving higher we watch the Fed balance sheet runoff closely and there was no run off last week. This leaves the Fed further behind the curve on the runoff–which is ok as they likely would not be able to meet their announced schedule of $30 billion a month – of course their announced schedule of $50 billion/month later in the year was always a joke, but we shall see. If they all of a sudden meet their goals we will see interest rates, on the long end, shoot sharply higher–very quickly.
Last week we see that 198 $25/share preferred stocks ended the week selling for less than $25 compared to the same, 198, a week ago and the average preferred stock ended the week ended the week at $25.01—a gain of a penny from a week ago. This is in a week which saw the 10 year sprint higher.
We had just 2 new issues being priced last week. Eagle Point Credit Company (NYSE:ECC) priced a 6.6875% baby bond issue. This issue will trade under the ticker of ECCX, but has not yet begun to trade. Giant MLP Energy Transfer Partners (NYSE:ETP) priced a fixed-to-floating rate preferred at 7.375% initially. The issue will be fixed until 4/2023. The issue is trading under the temporary ticker ETPPP on the OTC Grey Market right now (with the wrong name on the chart–Sunoco who they recently merged with).
The baby bonds from OFS Capital (NASDAQ:OFS) which were issued 2 weeks ago began trading last week–we attempted to buy this issue at $24.80 on Friday, but our order was not filled–we will try again today at $24.90 and likely will succeed.
At this moment as we write the 10 year treasury is trading at 2.98%, but if the notes traded with a yield much higher this week we would be surprised. Of course no one knows for sure so investors should have their seat belts fastened in case it spikes as a potential mini-panic is possible in preferred stocks and baby bonds.