Yesterday interest rates popped closing at 4.32% and this morning the 10 year treasury yield is continuing to rise – now at 4.37%. The S&P500 fell .2% yesterday and this morning the futures are down about 1/2%.
Really there is no apparent definitive reason for interest rates spiking–yes we can all speculate many different reasons, but in the end there are more sellers than buyers (at a given interest rate level) and buyers are demanding a higher yield (lower price). Maybe the economy is too strong–maybe the treasury is issuing more supply than folks are willing to buy (we know they are)–and on and on. In the end we have higher rates.
Yesterday we didn’t see much damage to income issues to speak of, but today we could start to see falling prices and higher rates start to become more apparent to investors. We always need to remember that a big downdraft in common shares WILL drag income issues lower–the only question is how much damage is done.
I will be watching for damage in income issues with short term maturities–i.e. term preferreds and baby bonds. These issues are unlikely to be hurt much as they near maturity–but if they are sent lower they would be good buys as their yields to maturity rise. Given the uncertainty I won’t target perpetual shares as much because capital losses could be severe if rates continue higher.
Well let’s see if we see a bounce in common shares mid day or if prices continue lower. It should be an interesting day – so many factors are present and it has been a long time since we have seen a big S&P500 tumble–maybe the time is here for a fall.
SYF B pulled back a lot today.
In fact I added at $24.40
Has Powell’s monetary policy been restrictive? Bitcoin, gold, stocks are all at highs. Experts keep expecting a pull back from jumps in the rates that never occurs. What is the outer time limit for lags in effects of monetary policy?
The alternative explanation is that expansive fiscal policy has offset the restraint from monetary policy. The deficit has increased from the rate of about $1-1.5T to more than $3T in two years (as measured by the increase in debt).
No one can really explain the strong economy: either monetary policy has only a minimal effect or fiscal and monetary policy are at odds with each other.
I am shifting back to more FF’s and floaters.
I’ve taken a liking to 5 year resets that trade through the bond desk lately. Some of these are trading well under par and will be resetting at much higher rates if they are not called (assuming rates hold current levels).
I own one from Stanley Black & Decker (CUSIP 854502AM3) that is going to reset/get called on 3/15/25. It trades a little below $90. If it resets, it’ll be the 5 year + 2.657%.
Assuming it reaches a price of $100 because 1) it gets called or 2) it starts paying a “market” coupon after the reset, you’d be looking at a potential capital gain of 11% in less than a year. You would also collect a 4% coupon while you wait. Assuming that plays out how I hope it will, that’s not a bad annualized return, right?
Dick, I like your strategy. These are good for ROTH conversions. Might I ask how one searches for these 5 year resets? TIA
10yr T ~ broke through 4.4% twice this morning, now at 4.37%…now at 2024 highs. Trend line is up since December 26, 2023 with 59bp up since that date.
Fed speak just now (Daly) ….no urgency for US to cut interest rates
Inflation heads higher, no FRB rate cuts this year, long bonds rates higher. Debt and service on debt aer major election issue (albiet washington keeps spending regardless of outcome.)
IMHO. Cheers!
Rates popping is fine with me. It really helped lower the price on some preferred and BB. Now I can add to key positions on “sale” to build them up to size. Looking for IG rated A through BBB- material. Except for ATCLZ. I keep throwing some loose change at that one.
I had a decent chunk of funds mature this weekend. Just invested these in shorter treasuries and CDs. Not liking the looks of things at the moments so staying shorter-term (<3 months) on the bonds/bills and under 9 months on the CDs. If things go south, I'll have a better chance of nabbing something with those funds later.
Tim ~
Brent & WTI up over 20% since December low & 8% most recent m/m. With Brent at $88.06 & WTI at $84.38 this morning, these prices will trickle through every part of our economy & of course will be inflationary. Throw in Houthi attacks in the Red Sea, OPEC production cutbacks, & a hotter Middle East with yesterdays Israel bombing of Iranian consulate in Syria & we have the external forces to push oil to $100 a barrel once again IMHO.