Monday Morning Kickoff

Is it Monday already?  We have reached the time of year when the weekends go too fast and Monday arrives way too soon, but alas it is Monday.

Last week the 10 year treasury opened the week in the 2.95% area and  bounced up and down 4 basis points from there through the week, before closing at 2.94%.  Out of all the economic items announced last week not a 1 of them was important enough to move the needle on interest rates.  Really the only 2 economic items anyone paid any attention to was the wage inflation component of the employment situation report, which was benign, and the announcement at the end of the FOMC meeting on Wednesday which also contained no real surprises.  The Fed announcement on Wednesday contained nothing to make anyone believe that the Fed Funds rate hikes wouldn’t continue and thus it is likely that we will see a 1/4 point hike in June.

For this week we have 5 speeches by Fed presidents–seems like these are always about the most important things that occur in a given week.  Markets listen way too closely to these folks–any given president has his/her opinion only–on its own it has almost no meaning (from our perspective).  We ignore them and investors would do well to do the same.  On Tuesday we have the Job Openings and Labor Turnover report (JOLTS) on Tuesday–no likely surprise or market reaction to this report.  Wednesday we have the Producer Price Index (PPI) being released and on Thursday the Consumer Price Index (CPI) being released.  The PPI is typically ignored but the CPI will have the power to move the markets. CPI is estimated at up 2.5% year over year, but at up 2.2% less food and energy.  With energy prices moving higher we could see a pop in the CPI (although not in the core rate which is less food and energy).  Of course rising energy prices takes a little money out of the consumers pocket which will not be able to be spent on durable goods down the road.  Beyond the above we will have some treasury auctions, as we do every week, but generally this week has minor treasury auction action.

Last week in spite of the lack of movement in interest rates we saw the average preferred and baby bond move lower by a 6 cents to $24.82.  We now have 210 $25 preferred stock issue trading under $25 which is 7 less than the week before, but still one of the highest levels of issues under $25 for the year.

The Fed balance sheet run off remained active with a runoff of $16 billion last week.  This is a large amount relative to most weeks and gives a two week total of $29 billion run off.  As we have written a million times we believe this runoff is what is keeping upward pressure on interest rates (along with huge treasury demand for new money).

The news we stumbled across this morning is that the treasury raised $488 billion in new money during the 1st quarter (January through April), but ended the quarter with larger than expected cash balances on hand because of higher receipts and lower outlays.  This means the needs for the 2nd quarter are just a measly $75 billion of new money.  This is good news for income investors as it will take a bit of pressure off of interest rates.  So we will have continued pressure on interest rates caused by the Fed runoff, but we will only have modest pressure caused by the needs of the Treasury.

A couple new issue baby bonds started trading at the end of last week.  The Sutherland Asset Management (NYSE:SLD) 6.50% baby bonds (NYSE:SLDD) started trading and closed the week at $25.13.  Also the 5.25% baby bonds (NYSE:HCXZ) of Hercules Capital (a BDC) started trading and are below $25 at $24.87.







Given that we have plenty of cash available in the Medium Duration portfolio we will add a 1/2 position (200 shares) to this portfolio today of the Sutherland Asset Management 6.50% baby bonds.  While we don’t view Sutherland as a great REIT we do think with a maturity date in 2021 and a 6.50% coupon it is reasonable to hold in this portfolio.

 

 

 

17 thoughts on “Monday Morning Kickoff”

  1. Thanks, Tim. I leaped in with a karate chop and got some SLDD last week.

    1. Hi Charles–I was just too busy to get on it–but things are calmer for me today.

  2. Tim, question on the IHIT position in the model portfolio… You previously stated this and I just wanted to get some clarification:

    “The goal is to repay shareholders $9.835 as the term ends which is the original NAV.”

    Are you saying that this is what they will redeem your shares at when they mature and you get to collect the monthly dividend along the way just like a mandatory callable pfd?

    1. it’s fingers – crossed you get that amount back, just like these other term funds..the NAV at 12/1/23 will ultimately determine what you get.. they attempt to dial duration, risk etc. to meet that goal but no guarantees! Seems like so far they have done a good job keeping NAV around 10. Bea

      1. Thanks Bea–correct of course–Yes GW that is the goal, but there is a chance for a holding ‘going bad’ or maybe early redemptions.

        If they are falling some short on the NAV heading toward redemption they may even cut back on the dividend.

        Some of these term funds have many different maturities that don’t align with the liquidation of the fund–but on this one they actually line up quite well with the liquidation date (not exact–but mostly within a few months.

        1. wow Tim, I never thought of that risk.. hoarding divs to meet target end date payout if necessary..a good point.. always learning!! bests Bea

          1. Hey Bea–we all learn from each other. I have gotten a lot more from readers than they have ever gotten from me.

  3. $73bil of 3-10-30yr sales this week plus 5 FED speaks AND a CPI #.. hopefully a lot of volatility results from this..to grab something off the watch list.

    Demand for recent auctions has been tepid at best.. if one of these fails to generate demand, we could see a spike.. meanwhile 3m LIBOR is over 2.35%.. up 1% in 6mo.. hard to get excited about fixed income personally. Bea

  4. Another recent release were Enbridge’s subordinates notes: ENBA (6.375% Fixed-to-Floating Rate Subordinated Notes Series 2018-B due 2078 )

    Cheers, Wedgehead

  5. I see GPT is getting taken over by BX..another industrial reit takeout.. I did not see where they addressed how they will handle the GPT-A pfds..they are at a prem to $25 call and up a little on the day .. read the prospectus but seems there are several options in the event of a takeout.. since BX is paying all cash, I would not want to be in the pfds if they are left hanging…

  6. Alert for all of us B. Riley senior note fans (RILYG, RILYZ)

    Riley reported earnings that seemed pretty darned good. So good, that on the common, they declared a special dividend. I’m only holding the aforementioned 2 notes listed above… Revenues were up 81% YoY!

    First Quarter 2018 Financial Highlights
    •Total revenues increased to $95.8 million from $52.9 million in Q1 2017
    •Net income of $4.5 million or $0.17 per diluted share
    •Adjusted EBITDA increased to $16.1 million from $15.0 million in Q1 2017
    •Adjusted net income of $8.8 million or $0.32 per diluted share
    •Declares special dividend of $0.04 per share in addition to regular quarterly dividend of $0.08 per share
    • Provides Q2 2018 net income in the range of $5.4 million to $10.0 million and adjusted EBITDA guidance in the range of $22 million to $30 million

    1. I hold full positions in two issues: RILYL, RILYZ. I picked up RILYZ when first issued and recently added RILYL for its short maturity. Hopefully, this one won’t be called early on 10/2108.

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