Earlier this week we had FED chair Powell speak and we expected that to be the highlight of the interest rate week. You can be certain that anytime one thinks they know what markets will bring, they will prove you wrong. We all knew Europe has had a weak economy–and this continues and I believe will continue for a very, very long time.
The plunge in the 10 year treasury (to 2.42% from 2.60%), since Wednesday, is kind of ominous–but does it mean that there is a recession ahead? Honestly no one has an answer to this–everyone thinks they have an answer–but no one really knows.
With the interest rate drop we can be certain that some new issues will be sold to ‘refi’ old higher coupon issues. We have been through this game before so we all have a hint as to how it could play out for preferred stocks and baby bonds. Maybe the good part right now is that many of the issues we hold are not redeemable until 2021 or later.
We have noted that preferred stocks have crept higher week after week and it might be a good time to ‘harvest’ some gains if you have gained a years worth of dividends in capital gains–of course everyone is different, but we certainly are scrutinizing our holdings for potential sells.
Of course any sells generate cash which needs to be redeployed–but the good part this time is that the money market we hold is paying 2.38% as of this morning (Gabelli US Treasury MKT AAA–GABXX). Certainly this could change in the future, but at least for now it is a hell of a lot better than ZERO.
The other thing we will be doing if we see economic weakness is scrutinizing many of our ‘base holdings’. We hold all kinds of Gladstone term preferreds and Gladstone Investment and Gladstone Capital should be watched for portfolio weakness since their holdings are Level 3 (value assigned by management since holdings do not trade on an exchange and value are not directly observable). We do not plan action here–but every time rates plunge like they have my focus gets a little sharper.