Rates Pushing a Bit Higher

Interest rates have pushed up a little in the last 24 hours as the FED FOMC minutes show they are likely to push rates higher in the months ahead.  Rates creeping higher is fine with us–but lets skip the 20 basis point jumps in a few days—let’s do 1 basis point a day for a week.

With the strong JOLTS (job openings and labor turnover) on Tuesday we think that one vote for higher rates is in for a December rate increase.  From our perspective absent a black swan the December Fed Funds rate hike is going to happen.  Anything after that is totally data dependent.   

In spite of the non stop trashing of the Fed by the talking heads I don’t believe that any sane person will push rates to the point of causing a recession–we will have a recession, but it is not the fault of this Fed–the punch bowl has to be removed sooner or later and it should have been removed years ago (or alternately the balance sheet run-off should have started years ago).

We will be on the road most of the day so will miss any potential fun today–oh well there will be plenty more ahead.

19 thoughts on “Rates Pushing a Bit Higher”

  1. Unfortunately, I need to classify the Fed chairman Powell as a “talking head” at this point. He is fueling the discussion. In my view, he should not have said recently that (a) we are far away from neutral rates and (b) that the Fed may temporarily overshoot the neutral rate.

    I agree with you, after December any further rate increases should be totally data dependent. This is what the Fed should say after that the December increase and then the criticism will stop.

  2. Tim,
    Are you interested in SPKEP at these levels (closed at $22.65 today).
    Thank you,
    Jay

    1. SPKEP ended the week at 22.55, close to an all time low. Earnings report is due in a couple of weeks and estimates are for a small loss. Spark had a very big upside earnings surprise last quarter, so another positive surprise should be positive for its preferred shares.

      At close to 10% dividend yield, I’d nibble at this one going into earnings.

  3. Anybody have any clues what happened to JPM.PR.D today? Was trading at $25.14 earlier in the day. Dropped like a rock before close on very heavy volume 5M+ shares. Closed at $24.50.

    The other JPM preferred issues seemed unaffected.

      1. that’s what I thought. Could be a trading opportunity at 2% below par for Monday. Will think about it some-more.

    1. Its really new. It is 5% range. It is not floating. It is perpetual. Anything like this might really get hammered in the next 6 months. I think we are used to “5% is good,” for too long and not used to them going down. There will be plenty of opportunities to chase them as they continue to go down.

    2. Steve A
      I can’t explain the drop. But I suspect the rise in volume is related to the fact that it was added to the S&P Preferred Stock balancing, which takes effect before open on 10/22. So the close on Friday was the last time to adjust portfolios. It seemed to me that a few quarters ago, you could count on being added to the list to cause a spike in price sometime during the two week rebalancing period. In the last few quarters, I can’t tell what’s going on. It may be that major funds make side deals so they can add or subtract as part of the rebalancing. Here is a link to the announcement a couple weeks ago that JPM-D would be added to the index: https://www.spice-indices.com/idpfiles/spice-assets/resources/public/documents/797361_spuspreferred-20181009.pdf?force_download=true
      I suspect volume will return to normal this week.

      1. Interesting. It was either this our the underwriters dumping their remaining shares. Back to $24.90 at 1:50 pm on 900,000 shares traded. I will look for re-balancing in the future. It may generate a trade opportunity

  4. Algonquin Power & Utilities Bond FF% 2078-10 USD
    New bond issue: Algonquin Power & Utilities issued new debt notes (US0158577090, 015857709) for 250M USD as of October 10, 2018.
    Algonquin Power & Utilities Corp. is a Canadian power company. It is headquartered in Oakville, Ontario, Canada.
    Issuer Algonquin Power & Utilities
    Bond Type Corporate
    Category Subordinated, Callable, Hybrid
    SEC Registered Yes
    Maturity October 10, 2078
    Residual Duration 59 years, 11 months, 21 days
    Currency USD (United States Dollar)
    Coupon Type Fixed Floating Rate
    Coupon (Yearly) 6.875%<=2023-10, 3.677%+USDLibor3M<=2028-10, 3.927%+USDLibor3M<=2043-10, 4.677%+USDLibor3M<=2078
    Coupon Frequency Quarterly
    Minimum Lot 25 USD
    Additional Lots 25 USD
    Issue Date October 17, 2018
    Issued Amount 250,000,000 USD
    Issue Price 100.000%
    Maturity Price 100.000%
    Bond Rating BB+ (S&P), BB+ (Fitch)
    Home Exchange TRACE
    Isin US0158577090
    Cusip 015857709
    Documentation (link) Documentation
    Industry Electric Utilities
    Sector Utilities
    Country Canada
    Region America developed
    https://www.investopoli.com/en/2018/10/10/algonquin-power-utilities-bond-us0158577090/

    1. I do like fixed to floating to cover risk. Also like the 5 year first float versus the 10 year that some do. I did a cusip lookup on Fidelity, no symbol yet. I do see a 3rd party price of $25.23. With that said, if rates don’t move up fairly reasonably drops to about 6.15% in 5 years. So the float seems miserly to me.

      1. Utilities tend to get away with those low kickers. I track one utility floater (6% par, Baa2) that goes adjustable but its a 3.22% kicker. And being it still trades over par, I am not a player yet.

    2. Their primary business is transmission, right? I fear these companies get hosed via renewables (i.e. required to transport without profit). See Germany for that movie.

      1. They got their fingers in a lot of stuff…Power producing, transmission, water and waste, nat gas dist. Kind of interesting company, but they have regulated and unregulated assets. Its in Canada and US. I prefer just totally regulated utilites so rate payers can help backstop screw ups instead of totally my wallet. I dont have enough brain power research this one enough to buy right. I got a little money after a sell Friday, and I already have my eye on a couple others I have researched already when my brain was interested in research.

  5. Re the Algonquin Power issuer, the adjustable rate is on the low side. On Oct 10, LIBOR was 2.42519%. Add that to the kicker and you get 6.100%, or .78% below the issue rate.

    The further the adjustable rate gaps down below the issue rate the more likely you are buying a low rate perp.

    1. Bob, to be fair no one knows just where LIBOR will be if/when this bond resets. “Real” utility bond rates are quite low (though I have some in the 7+% range I bought years back) because utilities are the last monopolies in the US. Let’s talk in 5 years when this Algonquin bond resets as there are so many events that will effect interests rates in the next 1800+ days. Wishing you profitable investing, Nomad

      1. If this issue was from Ameren, I would be all over it. But then again, Ameren wouldnt have to pay this yield either now though, so it is just dreaming on my part.

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