Monday Morning Kickoff

After a reasonably calm start to last week the S&P500 index took off and closed at 2970 after trading as low as 2893–a gain of almost 3% on the week. This based on a China trade deal that didn’t happen (although maybe there was progress).

Likewise interest rates traded on a trade deal the last couple of days last week and the 10 year treasury closed the week at 1.75%.  Early in the week the 10 year treasury traded as low as 1.51%.

The Fed balance sheet grew by just $4 billion last week.  Of course the Fed Chair has now announced that they will be growing the balance sheet and will keep doing repo agreements into November.  I had mentioned last Monday that they were doing asset purchases the previous week–prior to the Fed admitting it.  Let’s face it this is Quantitative Easing (QE) and the Fed is essentially underwriting the Federal deficit.  Additionally there may be bigger issues in the banking system–as mentioned by some, and I speculated months ago–German bank Deutsche Bank may be having issues of some sort.  Deutsche Bank is one of the largest holders and traders of derivatives in the world–and honestly, has shown itself to be a bad actor numerous times.

For those wanting to follow some of this closer you can access the Federal Reserve Bank of New York’s Repo and Reverse Repurchase page here.I have posted the link on the education page. The New York Fed does all the of the Feds repo operations on the open market.

Last week we had a number of new income issues announced.

BDC Gladstone Capital (GLAD) announced a new 5.375% note issue with a maturity date in 2024.

BDC OFS Capital (OFS) announced a new baby bonds issue with a coupon of 5.95% and a maturity date in 2026.  You can see further details here.

BDC Fidus Investment (FDUS) announced a new baby bond issue with a coupon of 5.375% and a maturity date in 2024.  Further details are here.

Lastly, New York Mortgage Trust (NYMT) announced a fixed to floating rate preferred which was priced at 7.875% to being with and becoming floating in 2024.  Recap of the details can be found here.  This issue is trading OTC Grey market under ticker NYMGP and last traded at $24.95.

28 thoughts on “Monday Morning Kickoff”

  1. Was reading some stuff from Alasdair Macleod, in which he has ideas on why the Fed was doing repo’s lately and injecting liquidity into our financial system. He also had some ideas and commentary on Deutsche bank being a reason why, with other banks “might be” refusing their collateral, and hence not trusting and perceiving it to have risk. He bases this on the Northern Rock bank in which he describes was the canary in the coal mine for the last financial crisis. He also had comments that the last crisis involved CDOs, and this crisis might be CLO’s, Lots of good points and was a good read this morning.

    1. Tim, I think you meant to write “…will keep doing repurchase agreements (repos) into November. and not reverse purchase agreements. Repos inject liquidity and reverse repos remove liquidity, and they are injecting a ton of money 🙂

      Also posted that this injection of liquidity will go into Jan and not stop in Nov. :

      “The Committee also directed the Desk to conduct term and overnight repurchase agreement operations (repos) at least through January of next year to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation.

      In accordance with this directive, the Desk plans to purchase Treasury bills at an initial pace of approximately $60 billion per month, starting with the period from mid-October to mid-November.”

  2. Is the Fed growing its balance sheet any indication of slackening world demand for US bonds?

    1. P–I checked last years and about half of our debt is bought internationally with the other 1/2 domestically–but many of the big buyers–China, Japan are not big buyers–except to replace any maturing issues.

      1. Last question was actually from Pete instead of P. I and screwed up and hit the post too quick. Tim, thanks for your reply and your hard work on this site. I’m an admitted neophyte and am trying to comprehend the correlations between Fed moves and future preferred rates, being especially mindful of potential value exposure of lesser coupon issues to rising rates. I am always wary of the herd mentality (currently rates will continue lower to zero). It has amazed me how fast the rate scenario has changed since last December and I assume it could reverse just as quickly. Any thoughts from all would be appreciated.

        1. Pete, remember perpetual fixed preferreds trade off more of the credit spread of government 10 year bond. Not the “Fed Funds Rate” which is what is mentioned in terms of “Fed lowering rates”. A lower funds rate and 10 yr are not directly related in terms of yield movement. In fact they can move in opposite directions, or one move and the other one not.

          1. Hi Grid- I was at the dentist earlier getting my choppers worked on and couldn’t further my question. What I was trying to get at to gain better understanding, is the Fed’s action of increasing its balance sheet (or increasing liquidity) just seems to be another name for controlling bond rates. If the Fed is buying due to weaker world demand (or ballooning supply as mentioned by Private below) then at some point this ability will diminish and bond rates would have to rise, but I guess the answer maybe unknown to how much the balance sheet could rise before problems would arise. I saw an earlier post of yours about the correlation between the 10 year and preferreds and that did clear up some things mentally for me. I am what you profess to be. A simple man, but I think it may be closer to the truth for me than you. Ha. Thanks again.

            1. In the short run the Fed controls the short end of the curve to a greater degree (and more directly) than the long end. The long end, in theory, reflects what is happening in the “real” economy.

              That said, be aware:

              1) the Fed has in the past directly intervened in the long end of the curve, most recently in “operation twist” in 2011-12, and

              2) given time, what happens on the short end of the curve will migrate to the long end. An inverted yield curve is inherently unstable. Either the short end is going to go down (relatively speaking) of the long term is going to come up (relatively speaking).

              IMO, there is a lot of static in the clouds and the potential for a mini rate panic is in the air. I plan accordingly.

                1. Pete, sometimes a person can try to learn too much and lose sight of the forest because of the trees. I think the best way to do it is set up a game plan that fits your goals, proper allocations, and risk tolerances and proceed from there. And understand historical price movements of preferreds in relation to yield environments. If for example, you decide to buy fixed perpetuals look at a 25 year chart on CNLPL to see where it goes in relation to where interest rates are at. I say this because it has been a venerable high quality issue for 50 years still trading (Im not suggesting buying it though). You will see how it craters into the $30s when 10 year was in 5-6% range and you will see a pronounced dip during financial crisis when everything got hit. And of course you can see how far over par it trades now in todays low yield environment.
                  We have been in a low environment for so long and people have such short memories (or werent invested in preferreds at the time) that many newbees have no ideas what the 2013-14 “Taper Tantrum” was…
                  This was a very historically important event….People today conflate generic “Fed Action” with interest rates. But all that is, is the funds rate. People forget the Funds rate was still at near zero in 2013, but long end started to “normalize” on its own despite “zero rate environment”. The 10 year went above 3% and preferreds cratered within days and a few weeks. $25 low yielding preferreds dropped to $20 in short occasion and greatly freaked many out. Then next thing you know people were selling because they knew 10 year was going to 4%….Except it didnt… Never assume you know anything about interest rates no matter what you read. CEO of JPM and the “Bond King” about a year ago thought 10 year was heading to 4% and 6% range this year… Except it didnt happen. Have a plan and prepared and now your comfort level. I have mine but it may only be good enough for my needs.

                  1. Yeah, thanks Grid. I’m like Sergeant Schultz: ” I know nothingggg” Ha. I have a game plan but as I gain more knowledge it seems to be changing. When I first started in preferreds last February, I was trying to create a long term portfolio that I did not have to baby sit. As I have learned more and more, it has become readily apparent that there is a time to sell as the YTC rises. I will definitely take a look at some of the chart comparisons that you suggest. This was not an exercise for me to be able to predict the future of interest rates, however, I do always like being on the very conservative edge, so I want to be as knowledgeable as possible. Thanks again and I think one of my greatest strengths is to admit that I’m like Sergeant Schultz. It keeps me out of a lot of trouble.

                    1. Pete, nothing wrong with fine tuning what you are doing as you learn and tweak things a bit. And who knows, if 10 year would jump back to 2.25% or so, you probably wont have to worry as much about YTC and prices so far over par, as the market may correct and take care of your worries for you, lol.
                      Anything can happen so you have to be mentally prepared. Here is a good example. AES-C was a $50 par 6.75% trust preferred issued in 1997. In early 2000s it caught “Enron flu” and AES-C traded down all the way under $5 a share….It however never quit paying its interest payment and eventually recovered and was finally redeemed in 2017 at $50.

    2. Personally, I think it is more an indication of ballooning supply than weakening demand. It results in the same imbalance, but cause/effect are reversed.

  3. Maybe there was progress and maybe there was no progress if you read China’s view this morning. Time will tell.

    Wall Street used to have uncertainty. Apparently, that has changed. Or was an excuse for other things they hate but never wanted to admit? I have a personal view and it will stay that way.

    One thing for sure, fighting the direction that the Street marches is very hard to do. But so is following a bad direction. I will stay conservatively postioned looking for an opportunity based upon fundamentals. I really would like to have some common stock indexes as part of my long term investment portfolio but haven’t since lat 2015. Don’t think, it will happen in 2019 either. It’s preferred’s, muni-bonds, and money market for the near term.

    1. Steve, I’m the new kid on this block, and I’m definitely not trying to be argumentative here.

      That being said, the main reason I want to build up a preferred/bb portfolio segment is exactly BECAUSE I don’t want to get frustrated about Wall St and its constant urgings to sell…no wait buy…no wait it’s China so sell…impeachment so sell…China is settled so buy…etc.

      I need some stability and calm to my portfolio. I don’t want to be ignorant of issues, but I want to keep them in perspective…in the background even.

      Snagged some of the coveted AGNCO last week at 25.12 for several portfolios.


      1. Whatever you do don’t listen to “Cramer”. Perhaps the greatest negative indicator the investment world has ever known. He was screaming “buy everything” right before the financial crisis and “sell everything” just as it bottomed and began its incredible run.

        Destroyed more wealth than even Rida.

    2. Steve, I have concerns too.. when pfds/bb bonds/reits/utes/div stocks all perfectly correlated with junk bonds last fall ( and SPY for that matter).. these all seem like crowded trades to me..driven partly by demographics (need for yield,) etf flows and complacency.. many of us jumped on this opportunity but what if they DONT bounce back like they did this year??

          1. (( lol so embarrasing.. Thank you Tim, what I did was post a link to a chart I created in Yahoo ( anyone can use their favorite “compare” chart w a 1yr time frame) and instead of a link I got the whole gibberish! sorry again folks))

            compare 1yr VNQ (REITs), VIG (div payers), XLU (utilities), JNK, HYG (h/y bonds), PFF, PGX (preferreds), SPY ( S&P500) … last fall they all perfectly correlated down.. throw in a treasury etf for comparison, say IEF (7-10yr) .. and what happens if they don’t bounce back or go out of favor?
            agree w Tim, when the FED is financing the deficit explicitly buy buying short term debt, it pays to be cautious and imo preserve capital as best as possible.

      1. Here is my take on last year. Given my track record, it’s probably wrong. But it’s how I am positioning. In last years selloff, the risk or fear was rising interest rates. So, it hit the preferred, bb bonds, and muni’s pretty hard.

        I believe in the next selloff, the risk will be falling interest rates, as the stock market looks to safety. So, I believe the preferred issues above 5% will be hard to find. Lots of call risk.

        Bottom line, I don’t see the same correlation due to falling interest rates versus rising rates.

        I hope others share their views

        1. That’s the problem with callable issues. If rates go way up, you are stuck with a low price and fixed dividend. If rates go way down, issues get called.

          That’s why:

          1) I pay a lot of attention to YTC, more so, in most cases, that current yield, and

          2) I like Canadian min rate issues. If rates go way up, you get a higher rate (when they reset). If rates go way down, you still get called but in many cases have a nice capital gain. Half the problem solved, anyway.

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