I will be adding a new link titled “Sandbox” in the right hand menu.
That link will get you to this page.
I had originally set up the “Reader Initiated Alert” page for ‘alerts’. I was thinking this, for instance, might be when a preferred stock is undergoing a temporary selloff and someone wants to let the population know about it quickly. Of course we all (including me) use the ‘alert’ page for general messaging.
I am requesting that we start using the Sandbox page for all general talk, and try to preserve the ‘alerts’ page for ‘alerts’.
I have had a screen up on one of my monitors all week where I see all comments – no matter where they are posted–it is a great page and I wish everyone had a page like that–believe me we all benefit from all the knowledge being shared. I don’t want to stifle any of the exchange of knowledge, but hope to get things a bit better organized by adding the Sandbox page.
Quite the week for me! Haven’t been this active in a long while. I bought positions in CIM-D, RITM-D, WTFCP, EICB, SPMA, WSBCP, HTLFP, and MITT-C. Have GTC orders for GECCH and EICC. Most of these qualify as short term from the short term list as they are term preferreds with redeem dates by 2029 or reset by 2029 per the five year treasury plus. The reset ones stand a good chance of being redeemed, but who knows? I still have about five more positions to fill to deploy cash. Guess I will make another pass through the short term list plus stay tuned to this great website. Thanks folks for giving me some ideas to investigate.
dj
Everyone on this site is advised to make their own investment decisions.
And I respect your recent burst of activity.
I just have a comment on one of your GTC orders…..
GECCH
On the Raymond James Summary of all BDC’s, GECC has the undesirable position of having the highest Debt to Equity of 182% and Debt to Market Cap of 219%
At 427MM of Assets, it is not the smallest in the survey, but it is in the bottom 5.
You may well work out fine on your purchase.
But
Those numbers are beyond my personal risk appetite.
possible short or sale if long: TBB and TBC, At&t baby bonds 5.625 on the former are up on no apparent news despite the rise in rates.
seems to be a buyer at rather absurd prices for these given rate rise lately.
News?
They are redeemable but I can’t imagine redemption
now trading at T+ abt 100 bps on a 2066 maturity
other poster says being called per fidelity. volume seems to indicate that’s correct
Most of us on this site participate in an effort to help each other in our investments.
Keeping that in mind, I suggest you re-read the following SA post that has been discussed before:
https://seekingalpha.com/article/4729081-the-unstoppable-rally-creates-a-broken-market-where-no-one-is-watching
The author’s message is that the marker can be very inefficient. He posits that many investors confuse Fed short rate decisions with long rate bond and preferred yields. In his view, many investors believe that future Fed cuts will bring capital gains to holders of all debt instruments.
His conclusion: the historical spreads between riskless Treasury rates and other longer term instruments with similar durations (2.5-4%) have now shrunk to @1% because of strong buying by investors trying to capture those future gains.
He opines, and history appears to support his opinion, that eventually those spreads will increase back to their historical levels.
I asked myself:
-What do I believe the future short and long term rates are most likely to be?
My opinion: 3-4% short; 5+% long.
Based on the above, I have been winnowing my portfolio over the past three weeks, selling some of the stronger 6’s and all of the weakers 6’s. Also reduced exposure to the higher yielders likely to be challenged by economic headwinds.
The above rate and spread assumptions generate a pretty pessimistic outlook for a long-term fixed rate preferred portfolio.
So, I have been adding 9 mo to 3 yr T’s and A rate corporates yielding 4-5%.
Portfolio now at 75% T’s/CD’s/A corp’s avg 1.3yr duration; 25% preferreds
IMHO
Meant to be a helpful challenge to my brothers/sisters:
How do you see the rates and the spreads going forward?
Westie,
Could you explain what you mean by a ‘weaker’ vs ‘stronger’ prfd?
And what sort of higher yielders are you thinking may be challenged? Reit /mortgage related? Thanks for your insight.
If not everyone knows, Westie comes from a banking background in a former life.
He is reiterating the point he made earlier about the safety of an investment verses the spread.
I have culled a few holdings and back to 19 to 20% cash equivalents
My problem is I am addicted to placing bids at the crap tables every time I see something posted here.
As for what to sell? some of what I sold I have seen them continue to run up in price giving me regrets that I sold. A few I keep walking down my asking price as it seems after the run up to and after the election the market has peaked and run out of steam.
Honestly I think we are going to enter a time of uncertainty over the next 3 months maybe longer.
Charles
You are not alone…..
Even through the fog of my pessimism
that temptress SPMA at $27.80 enticed me
Bought 300
Nobody’s perfect
Love this site
I bought it too. sold all duration past 5 years. 25-30% sgov. like mtba because of big mortgage spread, can add if necessary and mod-dur is low
Westie, can you still modify you post? think it’s supposed to be 24.80
Charles
Yeah, it was $24.80
Well Westie price seems to be holding. I joined you for 250 shares. Don’t know if you saw my post on my selling our CTA-B solid 6.2% dividend payer today, but I’m getting 4.32% in SPAXX
Market is getting over its euphoria. Remarks by J Powell, revisions upward for Sept. & Oct. retail sales and Christmas is around the corner. US dollar is strong as other countries are lowering their bank rates so money is coming here.
Companies are calling preferred and rolling over debt by going to P.E instead of the open market.
Conflicting signals. retail credit defaults up. Here layoffs are going up in the food industry. Amy’s kitchen shutting down a plant and laying off, WildBrine a division of a Wisconsin co. shutting down and laying off workers. Automation is increasing.
Westie 18…… Don’t beat yourself up…. I got tempted also and bought 500 shares at $24.80. Fit my strategy.
There are sock drawer stocks, and then, there are candy store stocks. Who can resist?
furcal
Others on this site are far more expert than me in judging quality
My simplistic measures in what to winnow:
– Mortgage REITS
– BDC’s paying out close to 100% of their earnings
– BDC’s that seem to have to issue more equity to keep up their NAV
– Those whose value has not gone anywhere (as in down) since I bought them
Not recommended to be followed – just my personal prejudice
DYODD
Westie,
I sold my only hi yield BB of a mortgage REIT only to see it go up. Sold a long term out 30yr insurance note and seem to have caught the peak. Sold another long term 24yr out maturity note of a financial bank holdings company yielding 6% on cost that continues to lose share price. Sold another note of an insurance co 34 yr out on maturity current yield about 6% seems I caught the peak. Sold CNTHO yield about 5-1/2% almost at par. Sold a BDC note due in 3yrs The current price is still holding at what I sold. Also sold SCE PH as it is at about full value to call to free up cash,
Buys
BDC Common up about about .80 on my cost
2 bank perpetual preferred yielding about 7% one Fixed rate reset.
Bought LNG carrier up about 1.75 share with plans to flip
Most helpful, thanks. I appreciate any suggestions for what metrics to use–I am trainable if pointed in the right direction. So for one example , since I had it on the screen, the usual caveat not a reco, ARCC seems to pass based on 12month earnings. Or would you look at a shorter time frame?
Sum of TTM EPS/Share $2.41
Sum of TTM Regular Dividends $1.92
from: https://www.bdcinvestor.com/arcc/
furcal
Best BDC site
https://www.raymondjames.com/-/media/rj/dotcom/files/corporations-and-institutions/investment-banking/industry-insight/bdc_update.pdf
page 20
Thanks again. I appreciate your thoughts.
Westie, thank you! I was just looking for something like this.
I would agree with everything you said, and would only add that those spreads can blow out with a financial crisis, like we had circa 2008. Spreads between bank preferreds and the 5 or 10 year Treasury can blow out to 10%+, although those large spreads can be quite transient, and impossible to time (for me, at least). So, one can’t assume that really tight spreads will drift back to normal. They can over that 2-4% range, they can get really wide, and get there really fast if people get scared.
How does a drop in 3-month term SOFR affect the price of a floating rate preferred? The prices of AGNCM, AGNCN and AGNCO have not fallen noticeably despite the significant drop in SOFR. Anomalous or typical?
From my point of view you have to continually look at F/F with a mind toward the premium current yield you receive vs a non F/F issue from the same or comparable issuer… If you do, then it’s understandable why SOFR can drop significantly without F/F rate issues dropping in price… Yes, your income goes down, however, so does the alternative income of the fixed rate issues that are your comparison… So you continue to achieve a premium rate of current yield, even though the amount you receive is getting reduced…. In exchange for this premium income flow, you can expect to give up hope of dramatic price appreciation on what you own in your F/F rate holdings..
2wr—I own the NRUC 7.76% F2F issue with a current coupon of 7.76% which is based on 3 months sofr plus 26bp plus 291bp. It had previously traded with an 8.42% coupon. I was not sure or had any clarity regarding how it would trade at the new lower coupon so I sold half my position at $100.3. It’s now trading at $100.475. This confirms to me what you have suggested. My income is down but the price is about the same. Also, my income is better than other possibilities and it’s rated at A3/BBB.
whidbey-
What is the NRUC 7.76% F2F issue you mentioned?
Also wondering about 7.76% NRUC– not like the one I see (only one).
https://www.nrucfc.coop/content/nrucfc/en/investor-relations/institutional-investing.html
go to sub notes.. click it open.. bottom one…
Someone help me remember – interest on NRUC is state tax exempt, isn’t it?
Can’t bring it to mind.
I doubt it, but it depends on your state.
Here is the list for NJ and it isn’t listed.
https://www.nj.gov/treasury/taxation/pdf/pubs/tgi-ee/git5.pdf
r2s—nruc cusip # 637432MT9
https://www.sec.gov/Archives/edgar/data/70502/000119312513161019/d525643dfwp.htm
Terms doc
2whiteroses – I am in your camp but can understand how others see it differently.
A spread is a spread, after all. It is a spread over the current market rate. This is common talk in the institutional world, but less so in retail.
One of my favorite themes is to buy discounted floaters that would trade near par if they floated today. The YTC can be quite juicy as many investors simply don’t want to wait it out.
This includes names such as KMPB and EFC-B. The pickings are getting slim though, I must admit.
Sold some of the LNC floaters recently bot. couldn’t resist a “quickie” profit.
https://x.com/yenoms/status/1857456315825529251
2wr,
I’m confused how a fixed rate preferred’s income goes down on a drop from SOFR. For example, take CIM-A (8% fixed) and CIM-B (floater).
When SOFR goes down:
1. My income from CIM-B goes down, but
2. CIM-A (“the alternative income of the fixed rate issue”) still pays $0.50 per quarter.
Thanks, 2wr.
If you’re looking at yield on cost, of course, that doesn’t change, but that’s specific to you and irrelevant to the rest of the world….. What I’m talking about is what alternatives are open for Mr Market Guy who’s looking to put 10k to work TODAY. You’re example of CIM-A I would suspect will have increased in price as interest rates, including SOFR rates, have come down, So Mr Market Guy’s going to be comparing TODAY’S current yield on CIM-A vs what he can get on TODAY’S rate on CIM-B and he’s going to decide whether the premium current yield he can get on CIM-B vs CIM-A is worth it to him, knowing he’s trading price appreciation for additional current yield when choosing B. So Mr Market Guy will probably have close to the same spread comparison as you did back when, only the income he can get from either will be lower than it would have been in either case before SOFR rates came down.. Make sense?
Multiple factors at play to set the price. Low volume issues can make unexpected movements at any time if there’s action. I often don’t know why, if it’s an outlying price I just trade it.
29360aaa8 enstar finance 5.75% callable 9/1/2025 or adjusts to 5 yr T +approx 5.5% (I forgot the exact add).
bbb-
Seems like it will be called;
price 99.04 a few minutes ago. YTC?? (I didn’t calc it but should be in the mid 6’s)
I just bought these. You can likely get a better price by waiting
I get near7% ..enstar was recently taken private by sixth street capital (private equity) in a complicated transaction which I can’t pretend to fully understand other than as owner of ESGRO preferred are likely to result in delisting.. bonds not available on schwab or fidelity platforms
Thanks mj was just going to look on Fido. Not interested in calling in.
i also could not find any information about the coupon reset
There are plenty of bids/offers. I hate Fidelity and Schwab only show bonds in their inventory, right?
These are the sub notes of Enstar Finance.
The 2040 Junior Subordinated Notes bear interest (i) during the initial five-year period ending August 30, 2025, at a fixed rate per annum of 5.75% and (ii) during each five-year reset period thereafter beginning September 1, 2025, at a fixed rate per annum equal to the five-year U.S. treasury rate calculated as of two business days prior to the
beginning of such five-year period plus 5.468%.
Enstar Group 5.75% (US29360AAA88) resets on 09/01/2027 at 5Y UST + 5.468%, maturity on 01/09/2040. Junior subordinated and rated at BBB-.
https://www.sec.gov/Archives/edgar/data/1806448/000136382920000167/enstarfinancellcjuniorsubn.htm
FSK Prices Public Offering of $600 million 6.125% Unsecured Notes Due 2030 – FYI
https://www.bdcinvestor.com/fsk/202411/fsk-prices-public-offering-of-600-million-6-125-unsecured-notes-due-2030/
I’m not sure if anyone has posted this before so I’m posting the massive Project 2025 doc in case anyone would like to research tax provisions. I’ve read exactly one page of this…the cover
This may or may not turn out to be relevant
https://static.project2025.org/2025_MandateForLeadership_FULL.pdf
It, not going to read as that is a what if and will just add to anxiety and stress.
I want to see how things are going forward.
“…will just add to anxiety and stress.”
Perhaps the makers of Xanax and antidepressants can use this for marketing?
Lifetime Fitness, perhaps?
(speaking of LT Fitness–no relation to this LT–they have a gym near me @250 per month and apartments next door at $3500 per month for a 1-br!!!)
Probably irrelevant. Project 2025 scaremongering is used for political posturing. Not affecting my investment decisions at this time. Other weird things going on that I’m watching more closely.
Martin, agreed. Here is an article on interviews with different money managers.
https://www.msn.com/en-us/money/savingandinvesting/greenlight-s-david-einhorn-says-the-markets-are-broken-and-getting-worse/ar-AA1u5cRC?ocid=hpmsn&cvid=9f86903f1be84929a48942e3ff20adc8&ei=34
Makes note 87% of fund managers have lagged hitting their goals for decades meaning investors have made less money invested in funds then going with a index fund invested in the SP500.
The question is with everyone following the same thing it feeds on itself creating a bubble. With people chasing growth stocks its creating P/E ratios of 100 to 500+
Sure these companies are profitable , but pay little to no dividends. You’re expecting to pass off the lunch bag to another investor willing to pay more so you can pocket some of your profits.
This does work in a growing economy where a company has a monopoly.
But like anything good times can come to an end. This worries me more than politics.
I went to Ron Arnott’s website and looked at the 57 funds and the companies his advisory team works with. The few funds I looked at were all up over a 1yr period. Are they going to continue to go up? maybe. Can they go down? certainly. Depends on the market and the economy.
All are at or close to their peak. I always regret it if I buy something and find out I bought it at it’s peak value. Sounds like I am buying a wine!
I still remember buying a Texas instruments Ti-10 new and paying 150.00 then selling it for 125.00 a month later to a guy from Taiwan in my science class.
Charles M…… I remember buying a Texas Instruments SR-10 for $150 in 1973 specifically for use in Surveying 301 at NC State. The professor announced the first day of class that he had changed the periodic texts and exam to reflect the faster calculations you could do on the new handheld calculators versus a slide rule. There was no way to pass the course without a hand calculator. $150 was a lot of money for a college kid in 1973! That was about half of a semester tuition cost then.
Charles,
You can see what he’s talking about very easily if you examine the preferred ETF and it’s components versus, say , preferreds that for one reason or another are no longer in an ETF.
Take PREJF.
It has declined over the last month as rates went up. I don’t think that’s true of PFF..though I admit I only cursorily looked at it.
martin-
Maybe there should be an “Other Weird Things Going On” discussion thread.
We can discuss weird things going on as it affects investment decisions. But it’s hard to do without triggering political bias.
“Nov 13 (Reuters) – B Riley Financial Inc:
* B RILEY FINANCIAL FILES FOR NON-TIMELY 10-Q WITH U.S. SEC- SEC FILING
* B RILEY FINANCIAL- SEES NET LOSS FROM CONTINUING OPERATIONS TO BE IN THE RANGE OF $130 MILLION TO $135 MILLION DURING THREE MONTHS ENDED SEPT 30
* B RILEY FINANCIAL- SEES ON CONSOLIDATED BASIS COMBINED LOSS FROM CONTINUING AND DISCONTINUED OPERATIONS OF $8.85 TO $9.18 PER SHARE FOR QUARTER ENDED SEPT 30 Source text: Further company coverage: ”
Ouch. Hmm… up a1% in after hrs
Paid 18.65 for HFRO/PRA (7.10 YLD) as the HFRO/PRA/PFF PAIR is trading near all time low (underperform) …on a 1 year horizon it went from over 2 sigma rich last month to its current level ..security is rated A-1 by Moodys according to the following article on S/A HRFO 50% discount to nav and 50% distribution cut
Did hfro get past all the drama they had? I have not kept up with them.
HFRO common made a new low today in its 2.5 year decline.
cef preferred shares require fund to maintain 200% asset coverage …if underlying collateral starts decreasing in value below require triggers the cef needs to liquidate some of its holdings and retire preferred shares… the fund’s leverage is low at 14% which increases equity protection for preferreds.. having said that the assets are “highly illiquid” resulting in fund trading at 58% discount to nav of 852 million (357 million) vs 135 million preferreds
I paid 25 for MITP 9.5 5/15/29 as the mitp/sjnk pair is trading at since inception low.. good article on S/A titled AG mortgage investment trust now offers investors 2 notes maturity in 2029
I bot fbrt/pre 7.5 perpetual at 21.97 for a 8.5 yield.. the frbt/pre/pgx pair has gone from 2 sigma rich to cheap and near the 200dma in about a week.. fbrt/pre has outperformed since march 2020 and is now trading near fair value (3yr horizon)
Ive hekd some FBRT-E ever since they were acquired. It’s in the “meh” category. Steady dividends, fluctuating price mostly based on rates. Some black swan risk.
good comment.. also good article on S/A on the company titled Franklin BSP Realty: 10.8% dividend yield but coverage slipped..
I continue to like and hold the fixed-rate reset preferreds that have a high reset off the 5-year Treasury including SPNT-B, WTFCP, RITM-D and yesterday purchased WSBCP at $24.99.
Gumfighter – Really like the way WSBCP is only trading 30 cents higher from the August lows; very stable trading price as opposed to coming in now and paying 10-20% higher. I will take a look a closer look at this one.
Gumfighter ….. I presume the chances of these being redeemed at reset time is pretty high and the price will hover around par because of that? You are buying them as a short time park of funds?
Dj – Looking it at it as a one year parking spot.
My current investing philosophy too! Otherwise known as letting the dust settle…. Best to sit on the sidelines and make some money as we transition to a whole new way of running the economy…. Just bought some WSBCP also.
dj,
I presume these reset preferreds y are one or two year holds, but you never know! I don’t worry about them, which is nice.
I also really like the reset preferreds, and continue to hold them while I am selling fixed-rate preferreds.
My quintet: BANCpF , HBANL , JXNpA , RFpF , WTFCP
FYI.
An interview in Barron’s with the future Treasury Sec’y.
https://www.barrons.com/articles/trump-fed-chair-powell-fire-4b79079f
KKRS @ 5.80%ish yield today.
Not news for many of you but I just realized that these notes are backed by KKR ($142B cap). I’m trying to put together a short list here as apparently we are going to possibly be looking at 6% yields shortly on some of these long term baby bond issues.
Per Q
……KKR Group Finance Co. IX LLC 4.625% Subordinated Notes due 2061,….The Notes will be fully and unconditionally guaranteed, jointly and severally, on a subordinated basis, by KKR & Co. Inc……
30 year high yield bond spread at 25 year low (2.63)
CMSC / CMSD
Ford notes all currently yield 6%
Would be nice for PFH to reach 6% but I doubt it.
PickleNick – PRS much closer to 6% and two years less maturity time.
I’ll take the 19 year treasury at 4.70 all day over long term sub debt at 6%
It – It’s really more of a strategic need, not necessarily an all or none, this is better than that etc. I have a perpetual/legacy annuity type income driven bucket that has to be filled and 6%ish high credit quality grade is the objective.
bbb corporate bond index near 25 year low (.98)
https://fred.stlouisfed.org/series/BAMLC0A4CBBB/
Has anyone else noticed that at Fidelity, KRP (Kimbell Royalty) does not show-up if you look into Activity & Orders? I bot in two accts in October, they show only in the portfolio and in the Oct statement. I think there might have been another stock, but can’t recall right now.
thx
Food for thought:
5 yr UST yield is higher than 5 yr JNJ debt by a small amount.
I’ve looked at inversions as high as 30 bps on this b4.
A situation like that is most likely created by market inefficiencies due to lack of trade volume or does it trade heavily daily? I have no idea how often JNJ issues debt securities and how much matures in approx 5 years.
Looking at the JNJ securities (AAA) they are actively traded and are 5 million$ up on a two-sided market. I see several maturities trading below treasury yields by a small amount
I trust JnJ more than I do the fed govt.
RE: TELZ I don’t remember where the discussion regarding payment due on TELZ was so I’m posting this in the Sandbox. I just spent more time than it’s worth with Fidelity who is telling me that no accrued interest from 10/31 to 11/7 will be paid regarding the call that happened on TELZ in 11/8. Their argument was completely wrong but bottom line is, supposedly, that they, Fidelity, have not been paid the accrued interest by the company and therefore, it will not be paid….They say take it up with the SEC. This despite what’s said in the prospectus, p s-18, “In addition, the Notes may be redeemed for cash in whole or in part at any time at our option (i) on or after November 30, 2023 and prior to November 30, 2024, at a price equal to $25.75 per note, PLUS ACCRUED AND UNPAID INTEREST to, but excluding, the date of redemption….” The bottom line of this is that f this is accurate, then we who owned TELZ have floated the company (is it Tellurian or Woodside Energy Group?) a 1 week loan at 0% interest rate… This cannot be right…. Anyone here get paid what should be due at other brokers?
BTW, while Fido was throwing around this and that argument about why no additional interest was due, they tried to say that the accrued was included in the 25.75 premium paid for the principal…. One guy even tried to throw out the term “make whole” call as if what happened was one because of the premium paid… This of course is NOT a make whole call. The premium paid was mandated in the prospectus along with additional accrued but unpaid interest.
Schwab didn’t credit any interest for the 7 days either. But another way to look at it is: They called it before 11/30/24 which made the payout $25.75 per share. They could have waited until 11/30/24 to call and the payout would have been $25.50 per share. Now add a month’s (10/31-11/30) interest @ $.17 per share and you would have gotten $25.67 total per share. So they really gave you $.08 more than you would have got if they waited til 11/30 to call. This is more than the $.04 per share you would have got for 7 days interest with the call at 11/8. So they really did us a favor by calling as they did – I’m happy
Glass is half full kind of guy, huh, Ken? LOL…. I like that…… Sure there’s no reason we know of that they didn’t wait less than a month to lower the premium they had to pay to 25.50 instead of paying 25.75 but they didn’t. If the prospectus is gospel, they owe us the additional 4 cents or a valid explanation why not…. I haven’t received either.
Dodged that on 10/10 – sold @ 25.93, lucky, I guess.
You gave up interest paid. $.5156 record date 10/15/24 paid 10/31/24.
IBKR too did NOT pay any accrued interest for the period 30/10 to 08/11
I bot newtg 8.5 6/01/29 callable 6/01/27 at 25.50 (25.07 stripped as it pays 53 cents quarterly and goes ex on 11/29) ytc 8.08 …this security is member of the laundry list ..good article on s/a titled Bargain Securities from Newtek One and Eagle point income company by Preferred Stock Trader
SMCI:
I looked back at the 2018 delisting to see what the price did and it appears the low was several days after the delisting. The stock did get to .85 but that was much later.
Conclusion:It would make sense to buy this if it’s delisted, merely as a spec.
I’m sure the business has been affected by the negative publicity, but this is not a financial so there’s not going to be a “run”
Reminds me a little of Tyco during the Koz scandal, less of Healthsouth during Scrushy scandal. On the latter Morgan Stanley prohibited me from buying 1 million shares at 9 cents under the guise of protecting me.
I was registered in the securities industry at the time and could have bought it through our trade desk but I would have been charged 1 cent per share on a 9 cent stock so I begged off.
granted, I would have sold at 29 cents most likely but I like to say I would have held it till $20
When auditors bail on a company this would seem to indicate there is something “financial” under the hood. A friend of mine thought the same thing, bought at $30 ish.
FWIW, EY resigned from SunPower back in 2015 and Nikola in early 2023. See where those are today But they also resigned from Catalent and that’s holding firm. But good luck to you.
I’m in “what’s wrong with this picture” mode. What’s wrong is crude at 68 looks like it could go to 60, presumably due to weak demand from China. Should that happen, is there another shoe waiting to fall?
rocks2stocks, oil stocks is where I have gotten in trouble in the last 15 yrs. This time is no different I think unless there’s a war there is too much oil and gas both being produced. Now you give me another sector to worry about !
Mid-stream the pipeline companies are safer, but even those could be in trouble in areas serviced by multiple companies or marginal oil basins.
But we are forgetting there is the expectation that the economy is expected to grow going forward which should increase the demand for related oil products.
Not easy to predict the future. I think our host Tim said it best, lets see how things are going and not make hurried decisions. Me, in my old age I am rearranging a few things and plan on being close to a chair to sit down on when the music stops.
rocks2stocks….. Depends who is wearing the shoe! If you are an American consumer $60 oil is sweet indeed. Crude oil figures into the cost of everything pretty much, so the typical American household should see lower inflation with $60 oil. If you are an American oil producer it hurts depending on where your oil wells are. Alaskan Oil takes a hit as it costs more than $60 per barrel to produce. Some US frackers have problems at $60 and shut down production. Canadian Tar Sands shuts down as their cost is something like $75 per barrel. Some countries take a huge hit too. Saudi Arabia depends almost 100% on oil revenue and needs $80 per barrel to balance their budget, even though their cost per barrel to produce is really low. Russia is another country that comes to mind also hurt by low oil prices. If crude oil dips way down below $60, say $40 it really plays havoc in the oil patch. A lot of folks will have a party though………..
dj-
What about beyond the oil patch? For example, if China’s fuel use has fallen way off, probably meaning less construction activity, are there ramifications outside of China?
It’s my impression that the price of oil and industrial metals is largely driven by expectations for demand from China.
Rocks2stocks…… The price of a barrel of crude is determined by both demand, political situations, and armed conflicts. China is just behind the US in consumption of crude. We are number 1 and with China consume about 40% of crude oil production. Big numbers …. Whoops! The Ready Mix concrete truck just arrived and I need to continue this later. My driveway is being poured among other little projects. Its an interesting subject and an area you can lose or make money easily!
I was hoping for -37.63 again.
The significance of the negative price for a crude future about to expire is so overblown. The rollover contract didn’t have a huge dip. I watched as it happened. Wasn’t interested in having to take delivery of crude at any price.
Whatever the official price is China is paying Russia a lot less. The same for Iranian oil.
There is a real willingness to let oil prices fall. Not only is it positive for American consumers and inflation, it is also a serious drag on Russian and Iranian budgets. The less money the evil empires have to spend on war, the easier ceasefire negotiations will go.
For us investing in the US energy sector we have to focus on the strongest most disciplined companies, since high prices won’t mask operational deficiencies.
Chris-
I’ve had the same thought regarding the benefits of a low oil price. But I haven’t heard of a way for the powers that be to cause the oil price to fall. It might be possible to create a floor by ordering big purchases to refill the SPR.
To be clear, I’m not predicting oil at 60. Oil would need to make a new low to put 60 on the radar. CL futures hit 65.27 in Sep and price has stayed above 66 since.
Oil inventories drive the market price outside of geopolitical turmoil. Inventories of liquid products are extremely low. Natural gas inventory is high and will drive price continuedly lower.
Oil price has meaningful upside if any supply interruption happens as SPR is empty to act as a price cushion.
Hey R2S
I think you are on the right idea, just keep in mind that the data from China is always suspect.
they say what works for them politically and once in a while it just happens to be true.
Also, China is buying a lot of oil from Russia that is likely not being reported accurately (and may not show up as financial payments if it is managed as a barter transaction). Russian production reporting is also highly suspect.
So, oil prices are going to move – but the data to forecast moves is even more fuzzy than normal.
Margin lending/borrowing update using SPX options boxes:
Large trades done 11/8 for Dec 26 and Dec 27 at 4.56 %
for Dec 29 @ 4.76%
These are likely rates at which you could lend or borrow using the cash-settled SPX options . These trades were in the $100 million range.
just good to know … better rates than a CD for those terms and OCC is TBTF so you don’t need to worry about limiting your trade to $250,000.
Also, no loss in interest from moving money around. This is just a very clean way to lend or borrow. Someone has even turned it into a business backed by Y combinator and they charge 50 bps per year to “manage” the trade, lol.
For indicative rates: boxtrades.com, syntheticfi.com
yikes, looks like an interesting subject but I an comprehending pretty much none of this post. Any decent sources you could suggest to learn about this, and do you have any opinions on how an individual investor might look into actioning? Thanks!
Ask and ye shall receive:
https://www.bogleheads.org/forum/viewtopic.php?t=371120
2WR, I tried and failed to find your post on EIIA’s “original issue date” so you could calculate its 1st div payment, but this should be the official amount, so I’m posting here in Sandbox. $0.242622
https://www.nasdaq.com/market-activity/stocks/eiia/dividend-history
Sounds right…. The prospectus says, “The first period for which dividends on the Series A Term Preferred Shares offered pursuant to this prospectus will be calculated (each such period, a “Dividend Period”) will commence upon the closing of the offering, or the “Date of Original Issue,” and will end on, but exclude, November 29, 2024.” The FWP says “Original Issue Date: October 17, 2024 (T + 5)”. I would have guessed there to be an extra 14 days of accumulated, but .24262 looks to be exactly 13 days worth calculated at .00564 per day. .07335 + .169271 = .24262.
Nice, sir.
Thank you both! Very much appreciated.
2wr, I confirm your math. I get 13 additional days too.
Beginning with Oct 17 (1st accrual day):
a. 15 days accruing in Oct.
b. 28 days accruing in Nov. (11/1 thru 11/28, day before 11/29 pay date).
Total days accrued: 43
They calculate the div on a 360-day-per-year, 30-day-per-month basis.
Form 424b1 (filed 10/11/24), page 80:
Dividends on the Series A Term Preferred Shares will be computed on the basis of a 360-day year consisting of twelve 30- day months.
mrinprophet, you’re welcome.
Investing strategy question:
– What is your assumed 10yr T rate going forward?
For me @4.5%
– What is your risk premium over 10T?
IG? Below IG?
For me IG 2.0%; below IG 2.5 – 30%
Right now I don’t see 6.0% yields on term preferreds attractive – even IG.
Spreads are too tight and I see little probability of 10T rates going lower and staying.
IMHO
Westie, Does history repeat? maybe not exactly. As we go down the yellow brick road who knows. I thought about the 5yr the past couple years and asked what it had been. When the GFC hit the bottom dropped out of the economy and the 5yr rate too. I also feel they left it too low for too long.
https://www.macrotrends.net/2522/5-year-treasury-bond-rate-yield-chart
I pulled my guess out of my you know where, and guessed 3 to 3.5 %
On one hand we could see inflation again and have rates go really high or we could see another GFC and the bottom drop out of rates again.
I left the question out about IG and non IG to keep it simple, but also because I know solid IG companies like GE, ATT, Boeing can change overnight.
So I started with SOFR and say 300 points but then I see what has been happening the last 6 months and how quickly SOFR can change so I started adding preferred with 5 yr Treasury plus 300 point reset feature.
So on one hand I have preferred that can change every 3 months and 5yr reset preferred that lock me in for 5 years.
With both I’m still going to be playing the trade game trying to figure out what to hold and what to get rid of.
I see 10 year as 1.3% – 1.5% over 1-3 month rates. 4.5% – 4.7% seems right to me. This is based on the Fed hitting a target of 3.25% by the end of 2025.
I believe IG preferred should trade about 1.3% – 1.5% above the 10-year, so 6% seems reasonable to me.
Good discussion.
It’s what I like about III – different opinions.
Perhaps relevant data……..
FIDO secondary bond pricing yields as of tonight:
10T: 4.30%
10 BBB: 6.60% (actual 10 @ 7.53% but 6.60 in the 5 and 20 yr)
Spread: 2.30%
That spread is bond to bond.
Should be higher bond to preferred equity.
Westie, what BBB bond is that? I am seeing BBB spreads much tighter.
Good point
I just looked at the Fixed Income Summary screen which lists secondary market bonds available for purchase.
The BBB level shows 6.60% Prospect Capital as the leading entry.
Highest yield.
Below it drops to 5.8% which is the more representative rate for several IG issuers without an earlier Call.
Long ago I followed Doug Le Du, who wrote a lot about preferred stocks. I believe he is retired now.
I have saved a chart he shared from 2013. Basically, from 2000 to 2007, the spread of preferred yield to 10 year Treasury ran in a narrow channel between 2 and 4 %, with a bias towards the lower end of the range. Then, when the great disaster of 2008 happened, the spread blew out over 10%. By 2010, it had fallen back below 4%, but through 2013 had tended toward to the high end of the 2-4% range.
The point?
I understand that you can pick a chart to confirm your bias. Still, that chart sticks in my mind for pointing out the current spread is awfully low for the 21st century. It may be a new era, but everything I have read, and every feeling in my bones, tells me that the 10 year Treasury is headed up, and the spread between the 10 year T and preferred stocks is going to widen with the increased uncertainty about our economic future. A less certain outcome demands a higher spread.
Can I guarantee this? I can guarantee nothing. But I can say the odds are not in my favor. I have been reducing my preferred stock portfolio. If the 10 year T is going to be 4.5%, I want 7% minimum, or a floating rate that is attractive. Even then, I know that a fiscal or monetary disaster could clean my clock. I still see preferred stocks with a yield under 6%. I think that is insane. I can’t go there.
Dono said: “Basically, from 2000 to 2007, the spread of preferred yield to 10 year Treasury ran in a narrow channel between 2 and 4 %. . .”
Dono, LDR Capital publishes this spread for REIT preferreds every month.
The latest reading is a 4.01% spread compared to the 24 year average of 4.32%. You can argue this spread is slightly tight, implying the preferreds are slightly over priced.
Here is the link showing the last 24 years:
https://ldrcapitalmgmt.com/wp-content/uploads/2024/10/Monthly-Scorecard-10.2024.pdf
We are not affiliated with LDS in any fashion and have no accounts with them.
Tex, good data. The chart comparing REIT spreads to BB corporates suggests Preferreds are cheap. While both charts are helpful, comparing prefs to BB allows for current risk expectations. So yes, Preferreds may be fair value from a historical view, but are cheap when taking into account current market conditions.
BTW, it would be fantastic if they broke out equity REITS w mortgage REITS. Big differences…
Thanks, Tex, for sharing that chart.
Not sure how to compare that chart with the Le Du chart. REIT preferred stocks are about 10-20% of the overall preferred stock market, are generally higher in yield, and therefore presumably higher in risk. Mortgage REIT preferred stocks, in particular, I regard as dynamite with a short fuse; that is to say, I avoid.
I would love to see a chart of all preferred stocks vs a Treasury rate over a long period of time, as well as different kinds of preferred stocks vs a Treasury rate over the same long period of time.
I have not been able to find one.
Dono, I have all of the data. If I can find the time, I will generate one and share the data. It is actually not that hard to do. Since we cannot post (graphs) attachments here, it would be the numbers only . . .
Tex the 2nd,
thanks for posting that LDR capital management link. They have some other REIT information on their website that I perused also and I learned a few things. Nice clear communication….
Strong buy for 2WR living in Asheville. A friend of ours is on the board of one of the companies we talk about around here. He visited Asheville frequently before it got trashed in the recent floods. He sent us chocolates from a place he visits every time he goes there. He rates them up there with the ones he gets on his trips to Belgium and France. 2WR, if you fancy chocolates might be worth you stopping in some time.
https://www.frenchbroadchocolates.com/
We have no financial relationship with them in any account, but do like their chocolates. Yes, this is a little obscure.
Nassau (fka Phoenix) q3 financials were released last week. Nothing of note jumped out as I find their financials confusing. E.g. showing large losses in one area but gains in other sections.
FWIW, First trust has their position marked at $18.51. Can be bought via Schwab Fixed income desk for slightly over $19. I think it’s decent value (for high risk) given the massive run up in credit and some of their recent equity injections. Of course, I would happily take a tender at 21.50 if they offer :).
I know Grid was an occasional holder of this issue. Anyone else hold and wiling to share thoughts?
Lots of growth and capital injections…
https://www.reinsurancene.ws/kbra-upgrades-ratings-and-assigns-a-positive-outlook-for-nassau-financial-group/
https://www.pehub.com/golub-capital-to-invest-200m-in-nassau-financial-group/
https://www.businesswire.com/news/home/20240708865837/en/NEAM-Announces-Private-Placement-Strategic-Relationship-with-Nassau-Financial-Group
https://www.reinsurancene.ws/am-best-revises-issuer-credit-rating-outlook-to-positive-for-subsidiaries-of-nassau-financial/
I have a position in these Nassau bonds, and keep track of it regularly. I noticed there were a bunch of trades this past Thursday at 17. There is definitely a cyclical pattern of trading here, but with the Schwab bond desk being what it is, it’s hard to take advantage of the lower price point. The financials are hard to understand unless you have deep knowledge of the insurance industry which I do not have.
I think it was Grid who convinced me to look at these way back when. Without him here to look at the nuts and bolts and comment on this, I am somewhat less comfortable about it than I was before. However, Azureblue has a position in these bonds and says he is holding on to them through maturity.
The trades in the 17’s tend to be smaller lots, meaning they are folks just looking to sell and have to take what they can get.
The John Hancock pref CEFs, the ones that trade at premiums, have a large position in this name.
Maine,
Thanks for the link to Reinsurance News. I keep bookmarking sites mentioned on this III.
Maine, thanks for those links. Have had pfx since when it was trading. I’d need something better than $21.50 tender, that price still yields 8.7%.
That said, holding SLMNP and ESGRO soon to be delisted, my growing illiquid shares (and underwater) portfolio is getting significant. Just don’t want to stick my heirs with them.
Where does it say SLMNP is to be delisted?
Mortgage rates at 6.79% are running about 2.5% above the 10 year, below the 3% spread at the rate peak.
https://fred.stlouisfed.org/series/MORTGAGE30US
E*Trade appears to have the incorrect call protection listed on some CDs.
I was surprised one of my Wells Fargo CDs 949764EN0 was being called despite it being listed as non-callable on E*Trade Bond detail page. I looked up the CUSIP in fidelity and sure enough it said no call protection.
Anyone run into this?
TELZ – Has anyone been paid additional interest today on the call date at 25.75? Fido’s paid the principal amount but I think we’re supposed to be owed a bit more interest, aren’t we? I’m not overly concerned…. It happens sometimes that interest doesn’t show up at the same time as the principal amount… but I am curious as to how much ends up being paid.
At IBKR, only the principal and distribution to 31/10 have been paid, so far.
Same at Vanguard as of Saturday morning, 11/09/24
MUNI BUYERS, be aware:
elimination of muni interest exemption will e up for discussion in TCJA extension
The original TCJA intended to eliminate the muni tax exemption , I believe even for existing muni debt.
Now there are a number of sites–Bond Buyer for one, with articles speculating this will be on the chopping block as a “pay for”–again– under the TCJA extension.
The TCJA ended up only excluding advanced refundings of bonds–now an issuer can only issue new debt to refund existing debt within 90 days of the refunding. That’s not of any concern to me. Elimination of the interest exemption ( which is a proposal of the American Enterprise Institute and I believe the National Taxpayers Union among others) even prospectively , would change the credit profile of hundreds of thousands of issuers, and if applied to existing bonds would a) remove certainty for tax planning,b) cause a crash in muni bond prices, c)change issuer credit profiles d) reduce the incomes of millions of retirees, among other things.
I urge you to contact your reps and senators about this
https://www.aei.org/wp-content/uploads/2024/03/Making-the-Tax-Cuts-and-Jobs-Act-Permanent.pdf
Trader, I’ll take the bet it’s not going to happen. Those millions of retirees probably don’t even know what is in their 401k or managed IRA. The ones who do own muni’s directly are those funds and individuals like yourself. More of a select group who have a greater voice with those voting on renewing the tax cut. There are millions of homeowners holding mortgages who were not happy when the deduction for interest was capped. That happened precisely because the millions of voices were diluted by the sheer number. But the actual holders of Muni debt are more concentrated so their voices will be louder combined and harder for policy makers to ignore.
I hope. But who even recalls this was on the chopping block in 2016?
Fidelity has a piece out on the possibility but I can’t find it right now.
I really think big changed to taxation should never be done… or if needed only changes to the rates, and incrementally.
Forgetting about declining issuer credit profiles and upset retirees for a moment, the practical difficulty in eliminating the exemption is that local taxpayers will have to pay more taxes to float municipal bonds. Taxpayers at the local level will eventually figure it out when it hits their wallet. (My town is proud of its low taxes, but it issues low interest bonds like crazy to cover big ticket expenses. Kick the can. With Zirp, nobody noticed. )
There are a lot more voting taxpayers to upset than there are balance budget think tank daydreamers to please. Good post, thank you for the alert but I think the elimination has a way to go. JMO. DYODD.
With the size of the overall debt and the projected annual debt additions over the years ahead I will not be surprised if this is hotly debated or enacted as part of the bill. There will be a lot more such revenue raising such as this one at least debated or enacted into law. It’s got to happen as there isn’t anywhere additional revenue to be gained by budget cuts.
I agree, and I think I’m going to sell some of my holdings in munis.
I need to knock 20% off the pile before this ends up as a discussion item getting big attention.
I seem to recall it was almost enacted.
Easiest thing that should be on the block is removing the cap on FICA. I doubt anyone would even realize it.
The municipal bond interest exclusion has been a target of ire by tax theorists for a long time. It most benefits those in the highest tax brackets and only reduces the interest paid by municipal issuers modestly (since the breakeven rate between municipal bonds and other bonds tends to be around a 22% tax rate).
One big policy benefit of lifting the exclusion is that it would make municipal issuers able to be economically purchased by a wider range of purchasers including banks, insurance companies, and broad-market bond funds like AGG. It would also simplify a number of means-testing calculations like MAGI and SS provisional income.
There’s some intermediate changes that would mitigate the impact on municipalities while eliminating the handout to high-bracket taxpayers. For example, Congress could eliminate the exclusion but provide a credit for 15-20% of the interest, perhaps paid directly to the municipality.
In other words, it’s not necessarily a bad thing to adjust or remove the exclusion.
Disagree. I’m not in the highest bracket and get 40% of income from munis.
It’s a very bad thing to eliminate a 112 year old exclusion just to keep tax rates where they are.
It’s about the ability to plan, the “”know-ability” or certainty …stability , of tax law,
Respectfully lt, I don’t know if you’ve done the math. Let’s say you’ve got a NJ rate of 5.53% and most of that income would be in the 22% federal bracket. We can round that to a 27.5% tax rate. If NJ bonds are roughly 3.65% (the SEC yield on Vanguard’s NJ fund), then that’s a tax equivalent yield right around 5%. You can go buy investment-grade corporate bonds and get 5% right now (such as via the iShares LQD ETF) and get the same aftertax income, roughly, as NJ municipal bonds. The tax exclusion isn’t providing you with some amazing benefit. It’s a subsidy that is benefiting the NJ taxpayers, not you.
Now imagine somebody with a 32% federal bracket and 6.37% NJ bracket. The tax-equivalent yield on 3.65% NJ bonds is right around 6%. They can’t find 6% bonds of equivalent credit risk to match the NJ muni bonds. The muni income exclusion is a free lunch for them.
The municipal taxpayers see the benefit of the exclusion relative to comparable credit risk, the point where there is an equilibrium for investors choosing municipal bonds vs. alternatives. But they don’t see the benefit of the extra free lunch for high-bracket investors. In other words, NJ issuers at current rates would pay 3.65%, but investors experience that as a tax-equivalent yield of 5%, meaning NJ issuers would likely need to issue 5% bonds in a market without the exclusion. NJ issuers and their taxpayers are therefore getting a subsidy for the difference between 3.65% and 5%, and high-bracket taxpayers are getting a subsidy for the difference between 5% and 6%.
The federal government could literally just pay municipal bond issuers 25% of their interest costs to get the same subsidy they currently do while eliminating the subsidy for high-bracket taxpayers. In this scenario, NJ issuers could go issue their 5% bonds, but then the taxpayers would only experience interest cost of about 3.75% (after the supposed 25% federal credit to the issuer), similar to what they’re paying now. But there’s no free lunch to the high-bracket taxpayers anymore. Of course, the credit doesn’t even have to be 25%–it might be 20%.
Cervantes,
Let’s take NJ out of the discussion for a moment because you can always hypothesize a set of facts to make your argument seem to be reasonable.
Let’s look at a real world example. ME, I’m single and 65.
I’m in Nevada , with no state income tax. 55 million people live in Florida and , Texas, the 2 most populous states without an income tax out of 7 or nine , depending how you define “no state income tax.”
I can purchase a 30 year affordable-income callable housing bond from any state at about a 4.75-4.80 YTM, new issue. AAA rating,
A 30 year Texas school bond AAA, non call for 10 yrs is about 4.30 right now on a new issue.
The 32% FIT tax bracket (individual) begins at $191, 950, not a rich person’s income, but a nice retirement income level. The Net Investment Income tax of 3.8% begins at $200,000.
So, let’s assume a$225,000 income…certainly not a super high income, but a nice retirement income. It’s close to what I earn taking very little risk with a combo of mostly CD’s and munis.
The 4.25% tax free is a TEY of 6.6199 for a AAA bond.
The 4.75% tax free is a TEY of 7.39875 for a AAA bond.
here are your arguments and my counter:
1)”The tax exclusion isn’t providing you with some amazing benefit. It’s a subsidy that is benefiting the NJ taxpayers, not you.”
Response: Well, clearly not the case in a real World example.
2)NJ issuers and their taxpayers are therefore getting a subsidy for the difference between 3.65% and 5%, and high-bracket taxpayers are getting a subsidy for the difference between 5% and 6%.
response
Response: This argument completely ignores the purpose of 95% of tax free bonds is to make it easier to provide affordable housing, lower school funding ,and build infrastructure, all laudable purposes.
42% of muni debt is held by households.
Comparing to a fund is specious:
https://taxpolicycenter.org/briefing-book/what-are-municipal-bonds-and-how-are-they-used
3)”The federal government could literally just pay municipal bond issuers 25% of their interest costs to get the same subsidy they currently do while eliminating the subsidy for high-bracket taxpayers.”
Response: How did that work out for taxable Build America Bonds?
One word: Sequestration. The government stopped paying.
4)”But there’s no free lunch to the high-bracket taxpayers anymore. Of course, the credit doesn’t even have to be 25%–it might be 20%.”
Response: I don’t consider someone making $200,000 to be a high income taxpayer, despite the fact one could consider them a high -bracket payer.
I don’t look at the exemption as a free lunch. It’s an incentive to fund essential services, affordable housing , healthcare, etc.
Apart from these arguments, you’re ignoring the effect of changing something that’s been law for 112 years.
I keep referring to planning. The ability to engage in long-term tax planning has been a hallmark of US tax law for generations. By changing the exemption now, my suspicion is the demand for longer term paper will fall dramatically.
Certainty of law is something not just in tax planning, but in all US law. Businesses rely on certainty for planning of all types.
To summarize my argument: Why would you eliminate a 112 -year old exemption just to extend tax cuts on current income…and to lower corporate tax rates further? I’m not saying you’re stupid, rather this is a stupid idea because it substitutes the tax theory of those with an agenda for the real world example of harm to millions of retirees.
I’ve seen the step-up in basis on death is as big a loss to tax coffers as the muni exemption, and there’s no good argument for it I can surmise.
I don’t have a link right now, but I think the step-up tax loss is a little bigger than muni exemption.
In addition, the tax on the step-up isn’t even a factor until someone dies AND their heirs sell.
lt, thank you for providing your example of the TEYs of 6.6% and 7.4%. Those are for a 32% tax bracket payer with NIIT. To be clear, somebody with a 32% bracket and NIIT buying a municipal bond is exactly the type of taxpayer that is getting subsidized by the federal government. Those high TEYs are evidence of it. Let’s take 4.5% as the un-TEY rate, averaging TX and FL.
It does feel like you’ve chosen the callable municipal bonds to make it harder to find a non-municipal alternative. Nevertheless, housing bonds are closer to the securitized ABS market than municipal bond market. They may be AAA, but credit rating alone isn’t easily compared across types of assets. Further, they’re callable, which over the last couple years has come with a higher yield than just the credit metric alone (cue wider mortgage rates). So, the closest analogue I’ve got is basic MBS bonds. They’re in the same asset class and they’re taxable, and they generally have a government guarantee. They’re yielding somewhere in the 5.5-6% range per http://www.mortgagenewsdaily.com. Let’s take 5.75. If for some reason you think this isn’t a fair comparison, please provide more detailed links to the TX/FL housing bonds you describe since you have provided literally no information.
That means, again, that the equilibrium tax rate between the TX/FL bonds and the uniform MBSs is about 22%, pretty close to the comparison between the NJ situation and LQD. And that also means that a 32+3.8% is getting a subsidy for the gap.
1) “Well, clearly not the case in a real World example.”
It’s not clear to me why you brought up the example to prove that high-bracket taxpayers aren’t getting a tax subsidy. The point is that somebody in roughly the 22% bracket isn’t getting a material benefit vs. taxable bonds, but somebody in higher brackets like 32%+ is getting a federal subsidy. In this example, once the housing bonds are compared to other callable bonds, the same pattern holds.
2) a. “This argument completely ignores the purpose of 95% of tax free bonds is to make it easier to provide affordable housing, lower school funding ,and build infrastructure, all laudable purposes.”
I don’t know if you’re following the argument. It is obvious that issuers and taxpayers are being subsidized by the federal government, which yes turns out to cheaper government services of various types. However, a large part of the subsidy isn’t absorbed by issuers and taxpayers, it’s absorbed by high-bracket taxpayers. I stated clearly that if the federal government wants to subsidized the government services only, it can provide a uniform credit of 15, 20, or 25% of the interest of any municipal bond directly to the local government. In that scenario, the government services are still subsidized, but there’s no tax windfall to high-bracket taxpayers.
b. 42% of muni debt is held by households.
Yes, because banks and insurance companies typically don’t benefit from the tax exclusion as much as high-bracket households. Banks and insurance companies offset their interest income through net interest expense and reserve increase deductions, respectively. Removing the municipal bond interest exclusion would provide a flood of buying from banks and insurance companies.
c. Comparing to a fund is specious:
https://taxpolicycenter.org/briefing-book/what-are-municipal-bonds-and-how-are-they-used
Municipal bonds are regularly bought and sold in the form of mutual funds. I don’t quite follow why you think it’s “specious” to use information about funds.
3) How did that work out for taxable Build America Bonds? One word: Sequestration. The government stopped paying.
Anything in tax policy is subject to change. There are ways to design an interest subsidy to be more impervious to direct budget changes but I don’t need to get into that here.
4) “I don’t consider someone making $200,000 to be a high income taxpayer, despite the fact one could consider them a high -bracket payer.”
I didn’t say high income tax payer, I said “high-bracket taxpayer.” If it’s 32%, it’s a high bracket. Don’t put words in my mouth.
“Apart from these arguments, you’re ignoring the effect of changing something that’s been law for 112 years.
I keep referring to planning. The ability to engage in long-term tax planning has been a hallmark of US tax law for generations. By changing the exemption now, my suspicion is the demand for longer term paper will fall dramatically.
To summarize my argument: Why would you eliminate a 112 -year old exemption just to extend tax cuts on current income…and to lower corporate tax rates further? I’m not saying you’re stupid, rather this is a stupid idea because it substitutes the tax theory of those with an agenda for the real world example of harm to millions of retirees.”
I personally don’t agree with eliminating the exclusion retrospectively.
I also don’t agree that demand for long-term paper will fall dramatically. Currently life insurance companies don’t even look at excluded municipal bonds due to low rates. If the bonds had to carry market rates, there would be a flood of buying from insurance companies. Insurance companies like 30-year bonds.
I didn’t say I agree with any tax policy of extending tax cuts on current income and lower corporate tax rates. I will just say that outside of the particular politics of the moment, the kind of person who wants to get rid of the municipal bond interest exclusion generally is the kind of person who would like to see the TCJA expire and the corporate rates to tack upward a tad bit again.
Hi Cervantes,
Thanks for the reply.
If you want to compare what the rate would be if the AAA housing bonds were taxable, you have only to look at the taxable bonds also issued by the housing authorities.
The high yield is around 6%. These are a better approximation than MBS and it does indicate your claims regarding what rates would be have some merit.
Frankly, I don’t care. I engaged in very long term planning using , among other bonds ,housing bonds and Texas 10 year non call school bonds backed by the Texas PUF. All AAA.
That planning was based on a 112 -year- old exemption, exercising what was generally perceived as the most conservative investment strategy I could derive for a substantial portion of my assets.
If I must now substantially write down my portfolio , both increasing my tax bill by more than 100% and substantially lowering my net worth, i am unlikely to ever engage in long term planning again.
If you look at the MBS market as a comparison, you should be aware that among the institutional offerings of broker-dealers are MBS taxable-to-tax free conversions. These happen quite often . They are definitely a financial sleight-of-hand engaged in by having a housing authority purchase the MBS and issue debt that mirrors the MBS.
Still, there is a limitation imposed on each state , each year, on the volume of housing bonds that may be issued on a tax free basis , based on population.
They cannot just issue tax frees willy-nilly.
***My over-arching point is we should look at the laudable purpose of the bond issuance, not the person acquiring the bonds.***
You’ve dismissed with a broad stroke (sort of a “stuff changes, tough luck” argument) the fact that federal payments to offset interest simply do not
work.
Rather than continue this discussion, I will merely say we have a difference of opinion on where changes should be made and how they should be made. I appreciate hearing points of view that disagree with mine.
I’ve decided to start selling tax frees now, rather than wait to see what happens. I’m probably on the front end of the selling if it materializes. It doesn’t appear any taxing jurisdictions are having trouble floating new paper.
I’d worry next about the qualified treatment on dividends since the argument for that doesn’t involve a clearly laudable public purpose.
“ I’d worry next about the qualified treatment on dividends”
Ditto with the 199A deduction. If they can take away muni tax exemptions that have existed for 112 years, they can surely take away the 199A deduction which has only existed since 2017.
I don’t like the idea of funding corporate tax rate cuts on the backs of retirees by eliminating muni tax exemptions and/or qualified divs and the 199A deduction.
Cervantes,
I prolly should have waited a few days to respond to this because I had better arguments I did not express. I was perturbed . In any case I’m sorry if that came through in my comments
Cervantes,
Thanks for your post, Very informative reading.
I don’t see anything called-out concerning tax-frees / munis. Also thinking of muni CEFs. Seems very problematic / unlikely.
I did notice that step-up for inherited stocks would be eliminated- would use the deceased’s cost basis. I wonder if they did that, would the 10yr elimination of the portfolio start or go away so the portfolio would continue?
good discussion of munis, EIM and MPA the muni funds I follow (long EIM some lately) seem to be hanging in there. EIM doing a little ROC which I like as long as they don’t over distribute! a trend in activist-attack-CEFs world these days.
Bea,
The easiest thing to get rid of is stepped-up basis. That’s because the issue doesn’t ripen until the holder does.
From what I’ve read this is as big as the muni tax exemption
Bea-
Ripen -ha 🙂
Or as Ed Slott is fond of saying: ” When the life insurance policy ‘matures’ “
Trying to predict what a future Congress will do is like trying to predict Powerball winning numbers. (Especially since control of Congress is not even finalized yet) And even if Republicans retain control, their margin will only be a few votes in the House, so they would have no tolerance for defectors.
The most likely outcome is that everything expires because they can’t agree on extending anything.
98% probability all RED is the bet right now.
I’m certain Congress passes what Trump wants. They passed TCJA and he has a much firmer control of the party now
I voted against Trump. I do not agree with his agenda. But he won and received the majority of the popular vote (does not matter for election purposes). However, it shows he has the support of the majority who voted.
If the Republicans win the house (almost certain according to pundits) his agenda should be passed. Give the people what they voted for.
The only thing I would oppose is messing around with the filibuster. That should be left alone. The only reason, I bring this up is the retirement of McConnell out of Senate leadership. A competitive Senate majority campaign with multiple candidates and strange things could happen.
Investment positioning, my view is retail prices going up due to tariffs and even larger deficits. I am not a fan of lower coupon (sub 6%) issues going forward. Naturally I could be wrong.
SO GLAD TO SEE that the enforcement of not discussing politics is being done with such vigor on the website again. All week and before that there’s been one comment after another, +/- red team, +/-blue team, now we’re again reviewing the filibuster topic, etc. I guess it’s allowed until those “political grenades” are tossed again and Bea immaturely curses site users again?
I just saw this Franklin, I am sorry I offended you, I agree with you and Tim we should try to stick to investments and helping. I try to help. In the heightened political environment, I probably strayed got silly etc. and again am sorry. It WONT be happening again, believe me.
I don’t ‘feed’ the III site so I pop in and scan thru ‘recent comments’ to see what folks are discussing so I missed this. Actually many times a day, so many good ideas and discussions. My ‘job’ is Mom now and the joy I get self-managing my and her substantial assets.
In caregiving I try to do what I can, I am ‘on call’ now 24/7, happily lovingly so.
After bathing my now 91 yr old mother I care for at home yesterday, who desperately doesn’t want to be in a ‘home’ and stay at home, especially after the experience in recovery from her Jan. operation in a former Manor Care facility, with her crying- missing my dead sister as I washed her hair to prep her for a Monday Dr appt, with her asking why she lived this long, all 7 of her siblings and all her friend gone.. I pop in this morning to see what folks are saying.
Since I have a small allocation to a muni CEF now, EIM, reviewed these comments or I probably would have missed being called out ..wow…
A great way to start my day I see! financial social media..best left to lurk for sure.
Bea, thanks for your post.
I never looked, but does Project 2025 have tax proposals? It sure seems that will be the legislative agenda, and any proposals in there should be viewed as having a better than average chance of becoming law, as many of the authors will be hired into the administration
Given the current level of infighting within the Democrat party which will only intensify in the coming months, it is much more likely there will be defections to the Republican side.
Success has many fathers, failure is an orphan.
Even under the unlikely eventuality of the elimination of the muni interest exemption, I doubt even more that the change would be grandfathered to apply to existing munis.
how hard is it to transfer from schwab thanks for any help I need it
James, not hard, talk to the broker you want to transfer to they will initiate it.
Make sure to download any records from Schwab if you haven’t already. New broker will only show cost of stocks at time of transfer. Also go over a list of your holdings with the new broker to make sure they will accept everything you hold, some brokers will not accept certain stocks. If you have multiple accounts at Schwab like I did, you might just want to transfer only one to see how you like the new broker.
thank you
> New broker will only show cost of stocks at time of transfer.
I don’t think this is true – ACATS transfers cost basis information.
Note that it is usually better to leave a few bucks in the old broker accounts to keep them open and accessible.
Make sure the new broker promises to pay the ACATS fees.