Looking at the share prices of preferreds and baby bonds this morning I see we are getting no lift whatsoever in pricing even as interest rates continue to move lower. I had been watching this disconnect between rates and prices for the last 3 months—prices are at a level that matches the level in early June when the 10 year treasury was between 4.40% and 4.5%. So the question is were lower rates already built into pricing or are we going to see a 1-2% surge in the near future? Who knows for sure—I am still guessing we may see some money movement when interest hit the key 4% level (key only because it is a round number).
Yesterday Powell apparently delivered on the hinted coming September rate cut–so watching the economic numbers for the next 6 weeks becomes important. If we see hot CPI and/or PCE numbers things could change, but we know from history that the Fed backs themselves into the corner with ‘hints’ and they are doing it again. Yesterday ADP employment numbers came in weak–122,000 new jobs for July (versus 150,000 forecast)–now to see if the official government numbers show the same tomorrow.
Yesterday I did nothing–I am traveling and it makes no sense to make any investment decisions when I don’t have access to all of my ‘tools’. Investment decisions can wait until Monday when I will be back in my office.
I think it’s a combo of some of it priced in already and some of it not believing lower rates are forthcoming till longer. And, with the drop in the rest of the markets, there may be margin calls and such that force some folks to liquidate their more conservative shares – we shall see. My portfolios hit all time highs yesterday though – they are, however, down about 0.3% today.
I’m actually surprised the preferred market has held up so well to this point. Starting to see HY spreads move out a bit, but this market is playing out as I feared so far and is why I’ve been moving from preferreds into IG fixed market this year. We’ll see what happens, but I watch the spread of PGX’s yield over the 10Y as a proxy, and it at least suggests very tight spreads for PGX. I just posted the chart here if you’re interested: https://x.com/IdeasNon/status/1819373845838450957
Where are you buying IG fixed entities? I use Schwab and they don’t offer many AAA corporate bonds.
? “Like Button Notice (view)”
I am getting this at the bottom of every post. Is everyone else?
What to make of this?
dono, you see the interview on Yahoo yesterday with the CEO of Logitech saying she wants to go with a prescription based plan for a computer mouse? It’s getting ridiculous that every company is trying to rob you from cradle to grave. She is calling it a forever mouse. You will have software updates that if you don’t do them the mouse will quit working.
I hover over the like button and it says something about upgrading your plan. Tim is out of the office and he runs this site and pays for it himself. One of the reasons I started to do an annual donation as I know its not free for him to run this site.
Made me chuckle- I think you meant ‘subscription’ 😉
Logitech is crazy if they think they are the only mouse out there.
Gary, chuckle. Yep, too dependent on Spell check, I didn’t catch that one
I subscribe to ‘liking’ everyone’s comments!!! like like like!! I think Tim said there is a small cost to liking button and ea like?? not sure. Like you all.
FWIW I was hit with a wave of bearishness today, possibly because Buffet sold his BAC stake but also because its August and wanted some cash for “sales” come September/October.
I sold the riskiest stuff in my portfolio like my CLO equity ETF ECC and MREITs like PMT. In the case of the latter, I don’t see how they make money with a portfolio of ultra-low coupon MBS while issuing debt at rates north of ~8.5%. Indeed, they have negative interest income which is offset by ever decreasing origination income.
I still hold some MREIT preferred but sold my entire stake in a preferred stock ETF as it has many low quality issues and IMO preferreds are priced for perfection should something go majorly wrong with either rates or the economy.
Have you looked at this MBS strategy:
“A New Issue MBS Strategy”
https://www.convexitymaven.com/wp-content/uploads/2023/11/Convexity-Maven-MBS-Strategy.pdf
https://www.simplify.us/etfs/mtba-simplify-mbs-etf
Thank you for this. I’ve always considered buying tax-free bonds with MBS as the guarantee to be superior . In fact, at the institutional level, brokers market MBS conversions to tax free status. I found out they would only sell to institutional when my Stifel broker inadvertently offered me one .
If you buy tax free housing bonds, you are getting a bond that is backed by MBS in almost every case. You are also supporting low to moderate income housing.
What you are risking is an early call if rates fall substantially, so these are unlikely to trade dramatically above par.
Can you post pricing table of MS-Q? Thank you!
These are important discussions. Often, investors start with the assumption that the markets are completely rational, and then strain to come up with explanations for pricing. We should keep in mind that sometimes markets are not rational in the short or medium term.
How often it seems to be that the income received on my biggest dividend payment dates gets sucked dry within days by market declines of one sort or another…. it’s happened again today……..
2wr
I’m knocking on wood here- up well today and strongly every day this week, except the 29th- down very little.
Looking at the long list of divs & interest for 31st & 8/1 ( plus the rest of the month) is a “Rockefeller” div appreciation moment.
Economic news affects risk which can pull prices in the opposite direction as rate cut odds. Also you are correct it may be already baked into the price, if retail investors wait for the news they may be behind the curve. And the usual inefficiences such as month end selling can be factors.
Good points all! Just noticed the 10Y just popped under 4%. I just secured a UST Note (4.25% coupon, 12/31/24 maturity) for 99.666 for 5.06% YTM. A good 25 basis points below what I could get in the Spring. I keep laddering these in my taxable trading account because they are sans state taxes and require minimal margin.
I think there is a somewhat parallel tracking to Baa bond yields which have held up and increased somewhat in pfds. I look at this occasionally as a respected author has shown this in the past; that said to me you still of course have to look hard at due diligence on indiv issues and we find our gems. This author is anticipating being in cash at 80% by 1/1/25 and
also can see a scenario w high govt debt needs where the 10yr blows out to 5.5% as well, of course Dimon has said that too but not recently if I remember right, here is the Baa chart.. https://ycharts.com/indicators/moodys_seasoned_baa_corporate_bond_yield_weekly
I see a gradual slowing taking place in the economy, u/e claims, mfg, etc. which may? be affected lesser quality yields. So I still come back to due diligence, deep dives, help from folks here and my risk tolerance (low!) .. getting 2-3% over cash or 10yr rates is good for me for the risk, and yield over inflation, even in a taxable a/c.
Oh and Tim nothing wrong w sitting pat for sure, I trade far too much I fear as Charles will attest!! (lol luv ya Charley baby). Bea
Hi Bea,
Always appreciate your perspective. Can I ask you for a little more colour on why you feel you want to be at 80% cash come the New Year?
I’m hovering between 30-40% myself, and feel its about right for a little buffer of safety plus plenty of dry powder if the opportunities arise.
Of course, easier to do when MM have been 5.2% and better.
But what when they start to drift down…as they seem to be just slightly even now?
sorry- the ‘analyst’ who I respect told me that privately is ‘80%’ but really it is a combination of hedges, ‘cash like’ etc that HE is expressing at caution due to deficit/dollar/Treasury funding etc and high PE market, bubbles still working out. Not me.. but again I am cautious. I think most are, Tim etc here anyway.
I am at 48% cash (mostly SGOV and SPAXX which is hanging in there at 4.98% ) and am happy to grab safer ideas from here and elsewhere which are really helpful. Yes they are drifting down for sure. Hope this clarifies sorry to be so chatty lately this is a difficult and emotional time for me personally w a significant anniversary of a loved one’s passing this week.
Gundlach who I listen to for color only was positive on duration via ‘fixed’ vs floating where he has been hanging out. Guru’s make mistakes too don’t they, check out his DSL closed end fund! oops.. Maybe we should all buy the Nuriel Roubini ETF coming out!! omg.. take care all the best. B
What’s Roubini going to name his ETF? I’d suggest The Broken Clock ETF.
You hang in there, Bea.
Best wishes on your current sadness Bea.
Hi Bea. I own MS-E for a couple of years now. I call this one of my places to stash my cash and seems to be liquid enough for me to sell and buy when I need without much fuss. Its largely been the same price for 2 years now. I like higher yield and pinned to par fixed investments.
thanx Mr C will put MS-E on the hotlist, appreciated. MUFG of course controls MS w big holding bot in the GFC 2008-9 and both are well run co’s. Bea
I feel the love from my fav. Old cat lady!
Still hanging in there with the TU.
Maybe it’s trying to tell us that there will be no rate cuts this year? Or, just a lag effect?
Yaz, I wonder if it’s more that prices have already been moving up since early June with people expecting a rate cut and buying out of FOMO
Look at what I see here in the comments. People are talking about a safe dividend of 6 to 6-1/2% and even Tim is now shooting for a 7% average yield.
When 3 to 5 months ago everyone was wanting a 8% average and a safe investment was considered 6-1/2 to 7 %
Anything coming out in new issues over 7% right now is junk. Hard to say what can happen. If there is a disappointment I can see the market dropping.