Monday Morning Kickoff

The DJIA traded in a range of about 26,030 to 26,770 last week which obviously is in record high territory and closed the week near the highs at 26,743. The 10 year treasury traded in a ranger of 2.99% to 3.1% and at this moment is trading at 3.07%

Last week we had all kinds of housing numbers being released and they were about as expected except for housing starts which were stronger than anticipated–although builders cut back on applications for building permits to a 15 month low. The Leading Economic Indicators (LEI) which were released came in +.4% which indicates continued expansion ahead and helps validate both higher  long term rates as well as bolstering Fed rate hikes for this coming week.

For the coming week we have Consumer Confidence being released on Tuesday and while the markets give this little attention it is the basis for all things economically speaking in the U.S. as the consumer drives the economy.  The Fed meetings starts on Tuesday and ends Wednesday with no doubt a 1/4% rate hike in the Fed Funds rate.  Thursday will see a number of announcements with Durable Goods, Pending home sales and another revision of the 2nd quarter GDP.  Friday brings Consumer Consumption and Consumer Sentiment.  Let’s face it all eyes are on the Fed for the week–not for the ‘baked in’ rate hike, but for the press conference with Powell on Wednesday.

The Fed Balance Sheet fell last week by a couple of Billion $–that is 2 weeks with little movement so we should see a big runoff this week or next which will be supportive of higher interest rates.

For last week we had the issuance of a number of new issues kicking off on Tuesday with JP Morgan Chase (NYSE:JPM) selling a fixed rate preferred issue with a coupon of 5.75%.  Additionally tiny insurer Conifer Holdings (NASDAQ:CNFR) announced a baby bond issue with a 6.75% coupon.   BDC Hercules Capital (NASDAQ:HTGC) announced a 6.25% baby bond.  Associated Banc-Corp (NYSE:ASB) announced a fixed rate preferred with a coupon of 5.875%.  BDC New Mountain Finance (NYSE:NMFC) announced a baby bond with a coupon of 5.75% with a shorter dated maturity in 2023.  CMS Energy (NYSE:CMS) announced a baby bond with a coupon of 5.875%.  You can find additional short ‘blurbs’ on all of these below with lots of comments by readers.

We personally have little interest in the offering from last week, but at slightly lower prices (higher yield) the New Mountain Finance might be a decent long term hold.  Normally we would have like the Hercules Capital baby bond, but the maturity is out in 2033 which is somewhat longer than we would like–at least at this coupon and current yield.

We saw the average $25 preferred fall by 14 cents last week as the high quality issues ‘took it in the shorts’ so to speak.  It was actually worse mid week, but you saw a bit of a pricing bounce back later in the week as investors decided that the selloff was overdone.  We now have 192 $25 preferred selling for $25 or below.  This is 22 issues more than last week and certainly gives investors a bit of a higher current yield.

 

9 thoughts on “Monday Morning Kickoff”

  1. Hi Tim. FYI, on your list of babies COWNL shows as called. 2023 is the first call date.

    1. Should have said “first call date now” since the ticker was re-used. I hate when they do that BTW.

  2. It is nice to see the 10 year Treasury note finally over 3%. I’m hoping this makes for higher rates on some of the perpetual preferreds, although this may take a few more months to play out.

  3. Sure seems like a lot of floating rate issues have come to market lately. This makes me somewhat suspicious of the motive for this. One of the concerns I have is the expected transition in a few short years from LIBOR to SOFR as floating rate benchmark and how this might affect some of these issues that have maturities or first call dates beyond the transition expected in 2021. SOFR is expected to be a lower rate. Will LIBOR continue to even exist ? Will securities with a floating rate based on LIBOR have to be called or simply adopt SOFR going forward ? Any thoughts ?

    1. Nothing will have to get called if LIBOR goes away or is functionally replaced with SOFR or any other index. Most issues in the last couple of decades specifically allowed for a replacement index but even if not you won’t see calls for lack of LIBOR.

      That said, you may see consequences. It may get ugly and it may lead to a arguments between issuers and holders.

    2. The devil is in the details. I’ve seen some crappy language about index replacement in prospectus docs. There’s a lot at stake, and who do the rate setting entities (interbank groups) work for?

      1. Qniform, that 4 interbank overnight rate seems pretty prevalent in the prospectus. Clearly understandable…But to actually what it is I have no idea. I only have one adjustable issue now and it is currently live (got a big slug of NSS after buying more Friday), but I suspect it will be long gone by 2021.

        1. Hi Gridbird. SOFR is OK, although it seems to run consistently just short of the LIBOR fix (pun intended). See the NY FRB presentation here https://www.newyorkfed.org/medialibrary/media/newsevents/speeches/2017/Frostpresentation.pdf. Still it’s pretty good compared to the shenanigans with LIBOR. Older prospectuses (prospecti?) don’t call it out specifically and have wonky language sometimes. I’m trying to remember examples and I’ll post if I come up with any.

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