With the potential for expanding war in the middle east we are seeing spiking crude oil prices once again. This morning we are seeing west Texas crude trading near $90/barrel—we just had prices backing off from the $95 area we gas us all some relief at the gas pump, but now we are staring at a potential economic disaster. Or are high prices in the energy arena maybe a positive for income investors? Obviously one can’t make predictions with any certainty whatsoever–in particular in the middle east, but can a wider war drive prices to $125 or even higher? The premise is higher oil prices, over the course of many months, feed through to inflation, but also dramatically slows the U.S. economy–stagflation. Even though inflation flares up the Fed cuts interest rates because of a major slowdown in the economy. Just a thought–we’ll see.
Yesterday we had a red day once again in income issues as the 10 year treasury moved higher by 13 basis points to close the day at 4.85%.. Most us know that we (the markets) can handle moves like this over the course of weeks or a month, but there should be no doubt that moves of this magnitude are not going to be well tolerated by income issues. I didn’t calculate losses in preferreds and baby bonds but am guessing around 1/2% (on average)-ouch. This morning we have rates backing off a tiny amount to 4.82%.
Of course strong economic data yesterday–retail sales in particular, was the primary culprit in the movement of rates higher. Fed folks have been out in force and almost unanimously are now leaning dovish–for the next month. We have the release of the ‘beige book’ this afternoon so we will see what various Fed districts are seeing in their area.
This morning I have been perusing some bonds–in the 1-5 year maturity range. Just looking at investment grade issues–some tasty yields available mainly from business development company’s (BDCs). If you drop into the BBB/Baa issues (lower investment grade) you can get up to 9% yield to maturity (the hated Prospect Capital), but a much larger number of issues in the 7.75% area (yield to maturity). Because of the short duration of these issues my metric is yield to maturity–not current yield.
Well let’s see how the day goes.