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Rising Rates Less Hurtful

Wow these interest rates are moving too high too fast–guess Powell is putting ‘the fear of God’ into everyone with his hawkish speech yesterday.

On the other hand while rates have popped as high as 2.39% today, before settling into the 2.37% area the pricing of preferreds and baby bonds have not been hurt too badly. Early on when rates began moving higher many investment grade issues really took a hammering–now with the latest move higher losses have been modest–if there are losses at all.

I have mentioned that there would be plenty of opportunities ahead to buy investment grade issues – no need to rush in and buy full positions of an issue in one fell swoop–just leg in (dollar cost average).

69 thoughts on “Rising Rates Less Hurtful”

  1. What I seldom hear discussed is the impact that the increase in rates will have on the federal budget. As more and more of it has to get used to pay interest due to increasedrates, what impact will that have on the economy? Will taxes have to be increased?

    Seven increases in one year? Seeing is believing.

    1. Crickets from both parties and even the business media. Both parties are responsible for the structural deficit and the rocketing interest expense. Nobody wants to talk about how to remedy the issue. Imagine proposing a bill that requires all of the tax increases of BBB just to pay the interest and no goodies or new entitlements. Not a way to re-election?

    2. CNBC just made a liar out of me and had an interview with the head of the Congressional Budget Office which just published a study on the ten year deficit in light of inflation and higher interest rates. It appears to project the deficit going from around $800-900 B to about $1.6 T by the tenth year (increased interest expense net of increased tax revenues from inflation).

      I don’t know how ‘deficit’ was defined. Some day I hope that we will all begin to define deficit as the change in the national debt over the fiscal year. I don’t think that’s how they do it now.

  2. TDS-V so being perpetual have most abandoned this along with the rest of the perps?

    edit to add discussion: with the perps being at risk, what criteria are you using to decide if any are worth holding?

    1. TDS-V is yielding 6.7% @22.29. Wouldn’t be surprised to see it fall more and get the yield over 7%. Buying or keeping it depends on your strategy: for the long-term I’ll hold it. 6.7%-7% may be more than the S&P returns this year and next. You’ll see capital erosion but i suspect a bounce back eventually.

      1. Franklin, thanks for the discussion. I was just looking at TDS-V and wondering why it has dropped vs UBP-K which is still above 25. I am missing something,
        but unclear what.

  3. What is that phrase about getting the genie back into the bottle…
    IIRC the cause for stagflation was inflation from disrupted oil production as a result of the Iranian revolution, and Russia being functionally cut off from the world oil market has a similar effect.
    But these things seem to correct themselves, as demand has shown to fall here once the price of gas goes over $4.00 a gallon, and a sizable number of Americans change their driving in small ways to reduce their gas consumption, and because the oil market can’t turn on a dime, watch the price of a barrel of oil fall to $30.00 by August.

    1. Justin said: “watch the price of a barrel of oil fall to $30.00 by August.”

      Justin, I will take the “over” on your $30/barrel forecast. The price was up substantially before Russia/Ukraine was an issue. There were two major factors that caused this:

      1) Demand destruction in 2020 when Covid shut down the world. You recall a barrel of oil closed at NEGATIVE $37.63 on 4/20/20. In the US, many smaller oil/gas companies literally went bankrupt. The ones that did not laid off a lot of their field workers.

      2) Fast forward to 2021-2022. World is opening back up. Car/air travel is up in addition to product transportation. Oil companies that laid off all of their workers suddenly need them back, but that are NOT all coming back. Not to mention the BK companies are not springing back to life. The ESG pressure on banks/Wall Street is NOT to support carbon production, so money to expand is harder to come by.

      Interesting that the calls for Windfall Profits Tax on oil companies comes now. Where were they when oil companies were losing money, literally going BK and laying off employees in 2020? I do not recall any aid packages coming out of Washington based on “Preventing $4.00+ gas in the future so we have to bail out these companies. ”

      How many times do we have to see a boom/bust cycle in oil/gas to know that the next one is just around the bend? One day my oil/gas friends are driving Lambo’s/Ferrari’s, the next year they are in bankruptcy. Hope they stashed a few nickels away in the good times.

      From an investment perspective, we have had a low percentage allocation to oil/gas for a decade+. It has been dead money, going flat to down, until finally waking up in 2021. We looked pretty dumb for years holding it. Today it is not buying any new Lambo’s for us, but might do better than a new Yugo. . .

      1. Dont take all that bet, Tex. Be a good dude and save me half of it. I like that over bet considerably more than my $2500 bet on Winnipeg Jets over 90. Thank God I got it balanced out with the same bet on Blues making playoffs.

        1. Looks like I am late to the game as I want in on some of that Take the over $30 a barrel action too.

          That would be like taking candy from a baby

        2. Grid, my sons best friend is a 1st line defenseman for the Columbus Blue Jackets. I bet for my son their points total at 75 over when the over/under initially came out last year and they are currently at 67 points with (I think) 18 games to go. It gives me a rooting interest to watch the games all year and will give my son some extra walking around shekels. He’s in Dental School with very little free time, but he and his school friends watch every game Columbus plays. Much more exciting then the stock or bond markets 🏒

            1. Greg, that is so true! Every NHL hockey team has a dental chair in their locker room (very few of them have not taken a puck in the mouth) and each has a team dentist 🦷 I believe you would have to be a dental surgeon (10 years of dental school) and my son is targeting to be an orthodontist (6/7 years). I’m just hoping to get him off my payroll (haha) and that we have a peaceful world to live in 🌎

      2. I think it will all come down to increases/decreases in American and Russian supply. Right now self sanctioning is cutting back Russian exports (some say as much as 2-3 million barrels a day). India and China are buying Russian oil at discounts of $20-30 but they don’t yet have the pipelines necessary to ship the decline in export sales. I don’t know much storage does Russia have to keep producing. They probably will have to cut back. In the meantime, it looks like Iran will soon be selling their oil on the open market (maybe as much as 1 million barrels a day by the end of the year.)

        Washington might actually have to restore diplomatic relations with either Midland, Texas or Saudi Arabia (color them p.o.’ed) now that Venezuela doesn’t seem viable. I remain bullish even at $ 100 for the Summer.

  4. “Another version of “stacking nickles” rates rising so get to work? I noticed recently someone posted they bought their fist CD in 3 years, Yesterday I bought 2 large chunks of new 1 year T-Bills @1.64%, in my wife and my “96” years young mothers accounts 1year term, state and local tax free, kicks the federal tax can down the road to ’23?

    1. I guess it’s also time to consider what seems to be coming back in the way of incentives to open up new bank accounts of one sort of another…. I just noticed that Citibank is offering $300 to open up a savings account with $30k minimum that’s currently earning .60%. I believe the money only has to stick around for 90 days (it might even be only 60) and your bonus becomes locked in… That’s a 4.60% annualized return if you just take the money and run after 90 days…. I bet there other deals like this out there now too – anyone seen others?

      1. 2WR, I know you wake up every morning and put your “I love CUBI” pin on every morning, so whats your take on CUBI-E now?

        1. Yeah, that pin sort of stabbed me brutally yesterday with the common down 8.6% for no apparent reason. Volume wasn’t anything more than normal, there just seemed to be a buyer’s strike for some reason or other…. It way underperformed banks in general yesterday…. But back to CUBI-E, I’ve always thought it was a hefty +Libor rate @ +5.14 and was surprised when they called CUBI-D with its 6.50% coupon and +5.09 float rate but chose to leave E with its 6.45% rate but +5.14 rate outstanding. So right now E has about a 6.10% coupon which seems just about right……… So it is what it is I guess… Funny, I know you brought up a similar issue the other day that you were buying and I almost brought up CUBI-E but didn’t, so here you are doing it instead………ha

          1. I didnt remember you owning the common, I just remember you holding some of the preferreds. I asked because I toed in a few hundo just below par. The adjustment as you noted is what caught my eye. I could easily see this paying over 7% early next year if they keep it outstanding.

            1. Yes, I started buying CUBI common in the 20’s in Dec ’19 after having been in the preferreds for a few years prior…. At the time, started toeing in too early but ended up adding as low as 9.76 in April ’09. So to paraphrase Chico Escuela, CUBI’s been “berry berry good to me,” but still it’s had a few of these seriously bad down times despite management’s constantly accurate updates on what they believe they can achieve in future earnings… Right now I think it’s trading around a 9 P/E…

              1. What’s up with TDA? Looking at CUBI-E right now and it’s showing 5.36% and a changing dividend for the last three cycles – $.4031, .336, .3322, .3339

                Is this just bad data? I’m sure if they were paying the wrong amount, someone would have said something already.

                This is not the only issue I have seen this issue with, but I do not recall right now which other ones.

                1. Mark, remember its a live floater now. So its 5.14% plus Libor. Everything is delayed but at present Libor is .96% and rising. So what 2WR, stated was the eventual future payout.

                  1. Oh, right. I should have checked a little deeper – I didn’t think this one was floating yet. Seems pretty obvious now….. My question should have answered my question.

          2. 2WR

            If you like CUBI (as I do), you might be interested in a PRU issue of the 5 7/8% of ’42 that is callable on September 15,2022. Left uncalled, the dividend rate floats at 3M Libor plus 418 bp. I bought some yesterday from MS at 100.7. I like both issues as a place to park money for the medium term.

          3. 2WR
            “So right now E has about a 6.10% coupon”
            Is this right? As I read the prospectus, the rate for the present dividend period is the 3 month LIBOR rate on March 11 (~0.00826%) + 5.14%, or about 5.97% If I understand correctly, the 6.10% rate would not be effective until the next dividend period, assuming that the 3 month LIBOR on June 13 is where it is now. Is this wrong?

            1. nh – Sorry for not being clearer – yes that would be right for the 6/15 payment… What I was referring to was where we are right now for the future based on the today’s 3 month LIBOR rate and where we appear to be going, but I think you’re right regarding the actual next divvy to be paid….Thanks for clarifying.. The actual language is: “For any dividend period during the floating rate period, three-month LIBOR (the London interbank offered rate) shall be determined by the calculation agent on the second London business day immediately preceding the first day of such dividend period (which we refer to as the “dividend determination date”) in the following manner:…”

              1. Always happy to be of assistance. To split this hair even further, in my calculations, I assumed that the payments on 3/15 and 6/15 apply to the quarter ended the day before. In other words, the “first day” of the relevant dividend period is the day that the dividend is paid for the prior quarter. I’m not even completely sure that this is right.

                1. nh – If I’m following you correctly, what you’re saying is pretty standard ….. there are exceptions, but usually payments accrue from payment date up until but not including the next payment date. Am I understanding you correctly?

                  1. I think so. So the payment on 6/15 (for example), would be for the quarter ended 6/14; and then 6/15 would be the first day of the new dividend period, not the last day of the quarter for which the dividend is being paid.

  5. I have actually never purchased a preferred stock or baby bond in the marketplace — I have only taken allocations from the IPOs and flipped them in a few weeks or months. From my totally inexperienced point of view, the historical charts suggest the best strategy is to buy for the very long term only when credit spreads increase dramatically and not necessarily when rates peak . Think 2008/2009 and 2020.

    1. af…Have to go along with you on that. Picked up an assortment of long dated, lower quality, (BBB-) IG corporates coming out of the credit crisis and they just sit there and pay around 7%, no attention necessary. At this point they are well ahead for capital appreciation also, but I like the yield. The fed put makes it work by keeping the default rate lower than it would be without it. High yield e.t.f.’s in 2020, what’s next? Everybody’s happy. Good deals didn’t last too long in 2020 and low coupon issuance took over in a big way, but the outcome could have been substantially worse for risk assets in general without all that fed intervention I think. Both scenarios present buying opportunities for me, just different reasons

  6. The 2-10 and 2-20 year curve is very flat and on the way to inverting. Longer-term bonds are telling us that the Fed and already high prices will be successful in slowing the economy over the next couple of years. Yes, short-term (under 2 years) rates are going to continue to rise, and may eventually lead to an inverted curve of 30-day to 10 years, but longer-term rates may not have that much more downside. In other words, most of the damage in longer duration names may have already happened.

    1. Interestingly, I found 1978 had the longest more recent 2/10 inversion, which lasted 21 months. …
      For example, the inversion beginning in August 1978 lasted 21 months, and the curve inverted by as much as 202 basis points.
      Im not suggesting the past will mirror the present, but I was curious enough finally to find what a longer inversion looked like as I had never bothered to check as most recent ones were fairly swallow and quick.

      1. Grid, Chris….I remember in 1979, didn’t know much about money but I didn’t need to because I didn’t have any, I finally had enough to get a one year c.d. at 13.xx%, or a 30 year treasury at around 10% . Went for the c.d. naturally. Woops! If the long end is the place to go and the damage in longer duration names is mostly done, what does that say about income investing in the future? Makes non callable or make whole call instruments look better seems like.

        1. Lucky, my personal know nothing opinion is its way too early for me to be looking at lower yield perpetuals. The asymmetric risk doesnt seem tilted to my favor there. Im still trading and buying the term dated, call anchored, above market yield, and adjustables.

          1. Grid….Not withstanding some “gray swan” geopolitical event (can’t say we weren’t warned}, I don’t think there is much of a hurry to load the boat. For me, a little toe dip seems appropriate, for many it isn’t. That swing trading sounds like it’s working well for you. Got me thinking about it. Most of my positions are too small to make it worth it at this point. I was just thinking for a more long term holder, will callable issues eventually all get replaced by lower coupon replacements? Have had many tender offers but only one make whole call on an o.t.c. corporate that had a lot of time left on it. Had $1006/bond basis Make whole call @$2450. Looks pretty good compared to call at par for most exchange traded issues. Of course the coupon is lower. I like both.

            1. Lucky, as you well know, as much as we want it, there is very few perfect preferreds. To get something (like duration risk protection for example) and protect one flank, you have to give up something. Personally if there was no IBond limit, every penny I have would be tied up in those for a year anyways, ha.
              Duration risk, credit risk, market risk, yield risk, sector risk, etc. Its a land mine even in good times. Who knows…..

          2. I am certainly not calling for any “boat loading” here, as Grid points out the 2-10 inversion can last awhile. Also, stagflation may last longer than we’d like making our real returns paltry. Just saying that I, like many of you, have been rather short and accumulating cash, and am now very gradually redeploying some in longer maturities. Still not buying perpetuals yet.

        2. When the projections are 5-9 rate increases… it is generally not a great idea to think about long duration. Too early for me still. Too many folks jumping in/out, jumping back in when they think there is a bottom, and causing volatility.
          There has been some red/pain in fixed income, but not any level of capitulation. Also, too much uncertainty. I’m sticking with short duration, call anchored for the last several months.

          1. I’m with you Mr. C…. on the call anchored side, we should know tomorrow or Friday at the latest if AMH follows thru as they said they would in the last CC and calls AMH-C on its first call date of 4/24….. Have also been buying UMH-C for anticipated and stated plan for its call to happen on its first call date of 7/26.

            1. 2WR, I am playing the game with AMH-G. If they follow through there would be one extra dividend vs the AMH-F and I recently got it $.20 under par. I hope they have enough funds on hand to call both. I also have UMH-C and RILYO for the same play.

              1. 35s – Given that AMH-F and/or G would be a marginal decision to call presently were the monies not already raised imho, I purposely chose to just play F only…. I managed to Grid a trade or two out of it, i.e., bot, sold above the expected call proceeds then got back in again, so it’ll be interesting to see if there’s a presser on it in the next 24 hours…

                I’m also in UMH-C, taking UMH at its word when they said at last quarterly CC, “We will be using these proceeds [of a bond issue they did in Israel @ 4.72% for 5 year note] for the upcoming redemption [in July] of about $247 million 6.75% Series C perpetual preferred stock…” I managed to buy more UMH-C today at @25.18 and 25.14. Don’t forget that whenever they do call C, we will get an extra 15 days accrued from what would be normal, just like we did on MNR-C. So for calculation purposes it’s essentially going to be called at 25.06 approx.

                RILYO is a typical what are they waiting for RILY mystery. It was the RILYG issue of 11/29/21 that said they “may” use proceeds to call RILYO and yet they still haven’t done it.. Maybe they’re waiting for the call premium to decrease to 25.25 in May, I don’t know…….. I ended up moving out of RILYO and into RILYM which would probably be next in line but still has a short maturity……

    2. My concern is that the Fed will keep raising rates but not tame inflation, and then keep doubling down until the economy falters. Can anyone explain how raising short term rates will cause prices for energy and food to moderate? Alternatively, the inflation the fed looks at may be self-moderating: e.g., heating oil in the northeast has nearly doubled in price which makes it difficult to buy other things (a thousand dollars per two weeks). If so, the Fed increases may appear to be working on its index (w/o food or energy) but not on the main drivers of inflation as experienced by us ordinary mortals.

  7. Tim… Energy being so high so fast , everyone is being HURT, and everyone is raising prices base on that….Recession hits, so many
    bankruptcy . WE all be eating chicken salad….Georges

  8. Bullard was on Bloomberg this morning. He was the only one to vote for a 50 point raise this month. He emphasized that the Fed has to stop encouraging inflation and at least get back to “neutral.” He didn’t define neutral but I assume he means a non-negative real rate. If Bullard has his way the fed rate will be at least 2.0% by December of ’22 and 3% by ’23. I don’t think that the Fed will go all the way to 2.75% if only because Washington (both parties) will start to pressure the Fed to ease off for fear of the massive increase in federal interest costs. Normal inflation will be re-defined as 3-4%?

    1. Potter…Seems like non-negative real rates would put fed funds around 7% or so currently. The normal inflation rate will be determined by the fiscal/monetary policies pursued. Run a fiscal surplus and restrict access to the money supply , hello, deflation. Don’t see either of the two, but time will tell.

      1. What a difference 20 years make, ha.
        December 28, 2000

        Today, President Clinton will announce that The United States is on course to eliminate its public debt within the next decade. The Administration also announced that we are projected to pay down $237 billion in debt in 2001. Due in part to a strong economy and the President’s commitment to fiscal discipline, the federal fiscal condition has improved for an unprecedented nine consecutive years. Based upon today’s new economic and budget projections for the coming 10 years from the Office of Management and Budget (OMB):
        …….The market has been very tradeable past several weeks in income issues. Feels like 2021 again! Im just going to continue to do that. But not with the sub 5% par perpetuals still.

        1. Wow, for the good old days when politicians in both parties actually cared about the country instead of themselves. Well, at least somewhat.

      2. Perhaps I erred but I thought non negative real rate means that the ten year tips yield is zero or above? If so, you think fed funds will have to rise more than 600 bp’s to raise ten year tips from around -.6% to zero?

        In the meantime, Mester and Daily of the Fed are starting to sound pretty hawkish. Bullard’s coup?

        1. Potter….Was thinking more of the “Fisher equation” version. Real interest rate equals nominal interest rate minus the inflation rate

          1. Apparently in Fed speak, the neutral rate is a 2.5% fed funds rate at least according to the last two fed speakers

  9. The market doesn’t seem to believe we’ll have 7 rate hikes. After a few the economy revolts and the Fed reconsiders. If they plow ahead, look out below.
    But if they were serious abut fighting Inflation why did they wait so long to start the increases?

    1. IMO, the clowns were cought off guard.

      The numbers for what full employment is have changed from the historical average, it is not the historical average for the last 50 years, times change and the policy has to as well.

      They were stuck on this “transitory” garbage for too long.
      They may claim to look at the data. However, for a long time they made excuses not to raise rates because whatever it was that inluenced their data will eventually go away.
      This eliminated any credibility that they have. Numbers are numbers. When you start to select the numbers you want to produce the results you want just because you control the money supply is only in the self interest of the Federal Reserve acting as bankers.

      “He who controls the money supply of a nation controls the nation.”
      — James A. Garfield

      . On September 17, 1787, 39 of the 55 delegates signed the new document, (The Constitution)

      And then the rest was a mess ……….


      By December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law, it stood as a classic example of compromise—a decentralized central bank that balanced the competing interests of private banks and populist sentiment.

      1. Federal Reserve does not create or print money it simply is a local to America bank regulator. As a banking regulator they rely on banks to provide them input into what is required by the economy as they do not know.

        The banks for there input into the process get the privilege of holding treasuries as collateral against the risks in their loan books.

  10. Tim… I was thinking pretty much the same things you mention before opening this website. Also follow the same strategy you espouse. On the two or three days when prices got hammered, I opened up 48 new micro positions, most low coupon IG, some higher yielding that finally didn’t have a premium to call value vs. stripped price, that would have been way too small to make sense during the days of commissions, and added a bit to them since that time as warranted. As of the close today, 23 were still slightly ahead, and 25 were slightly behind. Probably should change my “handle” from “lucky” to “odd lot” l.o.l.

    1. Lucky–I only added 3 ig new holders–petty micro also–they are all up around 75 cents–got to get focused on getting some more.

  11. Yup, this is a real head scratcher ……………

    Back in 2018 when the same guy at the Fed started talking about doing the same thing everything tanked. 3/15/2020 being the low point.
    Now it’s like a yawn from the fixed income markets.

    I have my list and building cash.
    The May meeting may be the trigger. Reducing balance sheet and 50 bps rate hike should have everyone freaking out. Let’s hope GDP holds up in the mean time.

    1. Honestly Pickle I think a recession in setting up for the end of the year. Theses energy prices are killing the poorer folks (they suck for me too). Inflation in general is a real problem–looks like another social security raise for next year again.

      1. Tim—to me, the question is not whether there is going to be a recession in the next 15-18 months (I think by the end of the year is less likely), but whether it is going to be accompanied by stagflation? Shouldn’t a normal recession by the end of the year (only 9 months away) already have an impact on today’s interest rates? Maybe that’s why rates aren’t moving higher now—except for the recent spurt in yields which has really quieted down with preferred prices now moving slightly higher. I certainly don’t have clarity, but since I’m not a rocket scientist, I guess I shouldn’t expect to have clarity.

        1. A lot depends on Fed policy, and to a lesser extent governement policy. The harder they clamp down on Inflation the harder we enter a recession sooner rather than later. The more they pussyfoot around the more we have stagflation.

      2. I very much have the same feeling, Tim.
        Maybe that is what the expectations in credit and income markets are telling us.
        What a mess. And no I do not have any answers.

        I don’t recall exactly but it may have been Macro Mavens Stephanie Pompey who said sometime last year that the Fed has to raise rates (stage 1) just to cut them later to fight the next recession (stage 2).

        Granted, she has been a perma bear for as long as I can remember and can depress a bride on her wedding day when it comes to economic forcast, however, we could be in stage 1.

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