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.
Can anybody explain this to me? It occurs occasionally but drives me wild. Most often with low-volume issues
Say, I have a bid in for $24.35. The last price of the issue is $24.3501, so my bid is not high enough. Since I can only issue bids in whole cents, I lose out. How are bids made in hundreds of cents?
https://www.investopedia.com/terms/s/sub-pennying.asp
Thank you as I suspected. This is BS. But it is what it is.
Are there any brokers that let allow for sub-penny bid increments? I wrote code against the TD api and it forced whole cents. I didn’t really think about better order fills… that’s such a huge advantage….
Steve, a little more explanation on sub-penny orders. Most retail brokerages sell their order flow to a few large firms called “Internalizers.” The two largest are Citadel and Virtu. When you submit an order, be it buy or sell, the internalizer gets first shot to decide how to “route” the order. They use sophisticated algorithms to decide if they should fill the order themselves instead of sending it to one of the large exchanges like NYSE or Nasdaq. If the internalizer’s algo calculates a high probability they can flip the shares they will fill the order in sub-penny increments which passes all of the current SEC rules. If they fill the order, it get reported as a “dark pool” trade as opposed to being reported on a regular exchange. This is how brokerages can offer commission free trades since they get a fraction of a cent per share as a kickback from the internalizer.
The other possible explanation is that some firms have standing orders on “dark pools” that are “inside” the bid/ask prices that retail investors see. Say an issue shows 24.00/24.25. Dark pool orders might exist anywhere between those two prices, but you will not know that until an order gets filled.
After the fact, you cannot definitely tell which of these reasons for a sub-penny trade, so you can only speculate. Not that it makes any difference to the retail investor.
I can’t give you an exact percentage, but my guess is that well over 50% of the preferreds/babys discussed on III have hidden/dark pool orders that do not show on the listed bid/ask spread. You can show this by walking your order in 1 cent increments and see if it fills before it gets to the listed bid/ask spreads.
More to the story, but this is the executive summary.
Tex, thank you for all your posts; they are very useful.. As I recall, this is not the first time you have educated us on this subject.
I hope that Tim McPartland would consider including useful posts like this one as a “miscellaneous resource” or some other (new) category under the “Education” tab of this website.
Saw this interview with James Grant and found it to be insightful for anbody on this site that is thinking about the direction of interest rates.
https://www.youtube.com/watch?v=KhQTF55mDqc
I see lots of folks buying CD’s. In fact, yesterday I brought a 3 year FHLB paying 5.75% (callable Cusip 3130B1M87). I also purchased a 5.35% 1 year bank CD non-callable paying 5.35%. (monthly payer).
I also have large CDs maturing in July. As I look around at the preferred market, I’m not seeing much that interests me. Should I buy more CDs or agency debt?
5.15% for money markets versus 5.3% – 5.5% for bank CD’s. I think the 5.15% is good enough for me until we move out of slow motion. (Tim’s article today). When I look at the actual dollars in my pocket, the delta is not that great. Dry powder looks more valuable to me than having more money tied up. I am going to be sitting with more cash – ready to buy dips or new issues.
Totally agree, see my post below to Yaz. I think I bought the same one year as you. Personally I think the markets (and the geo-political world) are in la-la land.
Steve, just speaking for myself, I’m just rotating existing maturing CDs into some new ones, roughly same percentage of portfolio.
I’ve found SGOV great place for dry powder. pays roughly CD rates and very liquid if you see an opportunity, unlike a CD where there is a cost to selling it (if you can).
pig pile-
I pretty much split my 465 of he portfolio between SGOV & CLIP ( which can be a bit higher, but not every time.
I’ve found that return on the divs can be increased by using some available cash to buy, on the ex-date, an amount equal to the divs I will get a week or more later when paid. Can add-up.
Gary, yes I do that as well. Grabbing nickels and dimes every so often is better than nothing.
One can make the argument why bother with CDs at all if SGOV is paying so much but I feel that’s more to do with locking in some nice longer term (even though still short term) rates. Right now I’m pretty well set up for next 18 months to 3 yrs on CD rates as they are pretty much all uncallable. Have some Canadian Bonds and a few Agency Bonds that will be under threat to be called in the fall, that will be a bummer, that will be my next foray into Grid’s wonderland of Ameren perps.
This latest Bond drop in yields seems maybe like the real deal this time.
Pig, it does feel that way, but it has dropped quickly a few prior times recently only to climb back. Even though there is a duration reinvestment mismatch, I wouldnt be surprised if lower yielding IG fixed perps dont bounce much until the short end gets lowered. Many income investors dont understand the reinvestment risk hanging out too long on the short end of yield curve. The train already has left the station before they can figure it out.
Yet return of ZIRP seems unlikely for time being and other issues make definitive predictions impossible. So I am just still spread out on the yield curve and yet have some access to liquidity if needed on some “event”.
👇 this happened to me 2001 when money markets were 5% and treasures much lower. Lock it in.
Even if you will be dead before maturity, ~50% chance you will be able to sell at a premium. Just bought some 2067 muni’s yesterday. 😁
“Many income investors dont understand the reinvestment risk hanging out too long on the short end of yield curve. The train already has left the station before they can figure it out.”
Same thing happens w credit duration. For instance, in my mREIT space, the FtF/R have done much better than the fixed names, better than what the forward curve has priced in.
Some of fixed positions include: FBRT-E, MITT-B, LFT-A
These all trade at $21 or less and have fixed coupons in the 7.5 – 8 range.
Aaack! – meant to say: 46.5% of the portfolio
I haven’t understood the benefit of SGOV compared to other options. Cash can sit in something like Vanguard Federal Money Market Fund (VMFXX) that is paying 5.29% or similar for quick access. For longer term, CD ladders work well.
With SGOV I do not have to pay state taxes on the interest. It is also quite liquid with the spread being about 1 cent.
fc, not sure if you knew, you can get a 1/2 cent bump down from ask with a market order. I should clarify, at TDA I could. Haven’t traded SGOV since I got Schwabbed.
Maybe I’m too greedy but I want more than 5.4% non-qualified dividend. Falling prices are not a loss as long as they keep paying the higher divvies from when I bought it. Fear of large scale defaults is what would drive me into fixed income and I’m not there yet.
Martin, I’m greedy too. CD part of portfolio only 17% or so. Feel like I need a stable part of the portfolio so I can go out and play with the rest.
I agree Martin G, Maine, PigPrecious.. yes moving out the curve somewhat too myself as noted in my REIT post just now..and still cash heavy but nibbling away to build. Carter Worth the technician sees 10yr at 3.5% again..maybe it doesnt hold there..the short end is more difficult to move and has been anchored a while here at around 5.3% for SOFRs mostly due to tbill issuance I think..anyway happy to nibble around myself. Bea
I have a medium-sized 5.25% agency bond maturing today so looking to stash those funds somewhere…may just go the CD route to wait this bullish impulse out a bit.
CDs for me. One year at 5.35% non-callable monthly and a two year at 4.95% non-callable monthly. Still have cash (MMFs) and more CDs coming due in less than a month.
NEWTG – added some more yesterday taking my position from 1/3rd to just over a one half allocation in my world. If interest rates do come down, this one should appreciate nicely. If they rise a bit, I’ll just collect the juicy dividend in the interim.
A generic question I could use some advice with….I have rollover IRA’s in seperate accounts, because as I did rollovers I put them in new accounts (easier to track, IMHO). I have 4 accounts at SCHB and 3 Etrade (these are only rollover IRAs, in same persons name…. no Bene IRA or Roth IRA etc. ). Questions:
1. Can I merge these into one account per broker (paper work gets easier as I age)? I’d do it per broker for safety, so always have at least 2 of these accounts with 1/broker.
2. If I do NOT merge, is the RMD done per account, or just based on a sum total? Seems like advantage to merge, if that lessens the RMD efforts.
In Vanguard you can easily combine them from n one account and I think all financial institutions allow that. When it comes time for RMD each account will have its own RMD. The financial institution will calculate it and distribute it to you. If you are like me and take out money every month to live off of you probably take more than the required RMD. In that case the financial institution does nothing other than issue the document you have satisfied the RMD. If you haven’t then you have a short grace period to take the distribution.
You can take the RMD total out of any single account you want, at which ever broker you want, you do not have to divide it up among accounts. The IRS does not care as long as you take the full amount.
I take mine out of the same account each year, leaving the others to appreciate. Easier to see how things go.
Thanks Dj. In searching differently, I did find this on IRS site: If you have more than one IRA, you must calculate the RMD for each IRA separately each year. However, you may aggregate your RMD amounts for all your IRAs and withdraw the total from one IRA or a portion from each of your IRAs. You do not have to take a separate RMD from each IRA.
-Wish I found it before wasting folks time. sorry
-Will consolidate a few based on this. Tom’s comment is where I’m going.
before you all reply, I’d also like to ask if anyone has a good method to take transactions from these accounts into excel (Numbers, on Mac). Currently it’s a bit of work but I can work on automating some of it. But I am basically exporting transactions from each account (remember I have too many accounts), then adjusting column headers, then deleting all but buys/sell, sort by ticker, and I have a good spreadsheet for all buy/sell and open positions. But I trade enough I need to do this all once/month if I assume I can remember changes over 30 days, and thats getting harder. Moving to 2 or 3 times/month…well its too much time. So ideas are welcome. If we should move this to new topic area, please do. And I am on a MAC with OSX – that will never change…
that sounds more like something that would be better done with a database program and a scripting language like Python or Perl (which is already installed in MacOS X), which could then export the final product in an excel spreadsheet.
As Justin said, you might want to code this. Maybe I can help program something for you. Reach out if you are interested in.
Tony
FWIW- you might want to consider the SIPC coverage limits on each type / acct. in case you aren’t comfortable with the concentration.
Florida Atlantic University released its data analysis for US banks and their CRE exposure. A list of banks/metrics is embedded in the article. I am a little more wary of a few of the banks I was considering for CDs. I understand FDIC protection, but I wouldn’t want to get caught up in any delays/confusion.
http://www.fau.edu/newsdesk/articles/commercial-real-estate-screener-banks-failure
Some of the too big to fail banks are considerably down the list in terms of exposure so that seems encouraging. But, there are questions about their exposure via loans to REITS and BDCs.
Pickler –
Thanks for posting this link, I found it very informative regarding some banks that I own preferreds from.
Thank you!
This almost reads like a reverse shopping list.
Well described.
Pickler ~ thanks for the insightful list!
US banking regulators use a CRE/total equity ratio of 300% & above to note banks with higher risk of default. Interesting that banks #1-#67 exceed that threshold…understand your risks & rewards on these high ratio bank perpetual preferreds.
I am not sure just glancing at the stats tells the full story. One has to understand the majority of the loans. What does it matter if you borrow like a mad man at 40% of the value of the property? Naturally the assumption is in a CRE crash the property would only be worth half in the end allowing a sale to take place.
When we hear a large office building sells dirt cheap doesn’t that always include taking the debt into account? Thus a low price. The buyer assumes the debt.
Newbie I was thinking the same thing. I jettisoned Zion FTF 6 or so months ago. I do have Flagstar ( NYCB) preferred that I was flipping and sold 2/3rd of and holding the rest. I have 2 or 3 others on the list that I am going to look at now. Not surprised that COLB is up there but surprised WAFD is. I wonder if the report takes into account the difference between long term commercial RE loans and short term construction loans like what OZK claims is what is on their books?
Excellent article – I was looking for something like this and, share your CD concern even though, theoretically, FDIC will protect them.
Thanks, Pickler
I’m the conservative sailor, always preparing for the storm.
I’m not so worried about the individual holdings.
To me, the risk – the certainty – is that one of these days one, or more, of the listed banks will announce that it has added a huge amount to its reserve for loan losses related to a CRE holding.
My concern is a repeat of the March run on banks, centered on those with large CRE holdings related to their equity. My recollection is that there now are 67 banks in this realm.
The FDIC underlying document says that the problem is that many CRE’s have interest rate renewals that have yet to occur. (My own experience as a CFO is that our Sep 2019 borrowing resets this Sep. We expect an increase from 4.25% to 7.25%)
As a former banker, I can assure you that everyone concerned – the lenders, the borrowers, and the regulators – will do everything in their power to kick the can down the road as long as possible. Postponing the day of reckoning seldom cures the problem – only increases its size when it comes due.
I believe the market is snoozing in an environment of oblivious optimism.
I have exited all my regional bank holdings in anticipation of the day when Mr Market is awoken with the news that the CRE problem has yet to be addressed. On that day, I expect all regional bank stocks to be hit hard regardless of their individual risk.
Westie opportunity to buy them back at a discount rate!
Thank you – sold off my MBINM today because of the out-sized exposure. Out at 25.84, in at 24.50 plus, I collected a year of divvy. Replaced with a mix of MGR, SR-A and other.
And remember Justin’s rule of investing in banks….
Only buy preferreds where the common is trading at greater than the face value of the preferred plus the amount of put option premium on the common 1 year from now plus a small buffer, since the shares could be wiped out on a moment’s notice.
so Zion would be a good candidate for that, but something like Dime wouldn’t be.
Hey everybody, I’ve been reading about 3 month SOFR as it is used as the adder in the fixed to floating preferreds I own. With the talk about interest rate cuts from the Fed becoming more likely I’m sure there will be an impact. I found these little blurb about the overnight rate: The New York Fed calculates SOFR by taking the volume-weighted median (50th percentile) of transactions in three markets for repurchase (repo) agreements collateralized by U.S. Treasury securities. Three Month SOFR is the compounded rate over each business day for the three months as I understand also.. I also look at the graphs of 3 month SOFR and the Fed Funds Rate for the same time period and it seems 3 month SOFR roughly tracks that pretty good. So, if the Fed lowers the overnight Fed Funds Rate the 3 month SOFR will decline by about the same amount? Looks like to me lowering the 3 month SOFR by 25 or even 50 basis points is not going to have a dramatic effect on the floaters as they will still be over 10%. Maybe a 100 basis points or more will drop them to the high single digits and affect the price some. Any thoughts out there on this? Since the Nustar preferreds being redeemed I am thinking about rolling some of that over into another floater for the time being. The NLY ones look tempting. Also thought about MITT-C short time as it seems MITT is gearing up to redeem it this fall. Maybe I could get one quarter’s worth plus it is below par too.
Anyone been waiting for their 6/1 payment from CGBDL? Now 4 days late. Not sure if this is routine for them or am I getting Scwhabbed? TDA always paid on time for this one, Schwab likes to keep payments earning interest for them I noticed. But 4 days?
I agree that Schwab tends to pay ‘late’, but my 3/1 payment posted on 6/1, so maybe Carlyle is late.
Gary, thanks for your response. Yikes, just to clarify, you got your 3/1 payment on 6/1? 3 months late?
I amended it to 3/1, but it didn’t show-up.
FIDO was prompt with CGBDL my payment fwiw.
Gum, yes I went back and checked, TDA also paid promptly for me on prior payment. Sigh Schwab
I just received this from Schwab wrt CGBDL: “At this time we do show we have not received the payment from the issuer. I was informed we have already filed report to the transfer agent to located the funds but have not heard back. At this time we have to wait to hear back from the issuer and transfer agent. It may have been funded to the other firm but Schwab never received the funds yet. The moment we get them we will credit your account.”
Steve thanks for posting that info!!!
Schwab has another little trick to mask them holding your money – they will post dividends late and backdate them to the date they were due.
So, they may put the money in your account on 6/15 (or whatever), but they will put it in your transaction register with a date of 6/1 (sometimes it will say “as of”, but often there is no hint that it was paid late).
Hi all I was looking for opinions on via Renewables, inc Preferred: VIASP , 8.75. series A
Ive held it since 2021 but the company in now going private. The preferred is to remain trading on nasdaq. Any perspective would be appreciated.
I have owned 1k shares from the IPO date. My perspective is that it has been a roller coaster ride and I don’t like roller coasters.
It crashed because of fears that they would suspend the dividends. Going private is a different reason to crash, illiquid sells off for an unreasonable price but if they keep paying the divvies it’s worth keeping .But will they pay? Inquiring minds want to know.
Here’s a quote from page S-22 of the VIASP prospectus:
“Whenever a Dividend Penalty Event (as defined below) or Delisting Event (as defined below) has occurred, the Fixed Dividend Rate or Floating Dividend Rate, as applicable, shall be increased by 2.00% per annum (such resulting dividend rate, the “Penalty Rate”). During the Fixed Rate Period, the Penalty Rate shall be a rate equal to 10.75% per annum of the $25.00 liquidation preference per share of Series A Preferred Stock. During the Floating Rate Period, the Penalty Rate shall be an annual rate equal to the sum of (a) Three-Month LIBOR as calculated on each applicable Date of Determination and (b) 8.578% of the $25.00 liquidation preference per share of Series A Preferred Stock.
For a Dividend Penalty Event, the Penalty Rate shall remain in effect until all accrued but unpaid dividends on the Series A Preferred Stock have been paid in full and we shall have paid all dividends due on the Series A Preferred Stock for the two most recently ended Dividend Periods, at which time the dividend rate shall revert to the Fixed Dividend Rate or the Floating Dividend Rate, as applicable, until a subsequent Dividend Penalty Event shall occur.
For a Delisting Event, the Penalty Rate shall remain in effect until the Series A Preferred Stock is listed on a National Exchange (as defined below), at which time the dividend rate shall revert to the Fixed Dividend Rate or the Floating Dividend Rate, as applicable, until a subsequent Delisting Event shall occur.
A “Dividend Penalty Event” shall have occurred whenever dividends on any shares of Series A Preferred Stock are in arrears for six or more Dividend Periods, whether or not consecutive.
A “Delisting Event” shall have occurred if, after April 15, 2017 the Series A Preferred Stock is not listed for trading on the NYSE, the NYSE MKT or NASDAQ (each a “National Exchange”) or listed or quoted on an exchange or quotation system that is a successor to a National Exchange for a period of 180 consecutive days.”
Those seem like good protection clauses. The fact that the current majority owner wants to buy the entire company seems, on net, to be positive. Why would he invest more of his own money if he thought the firm would fail?
Full disclosure: I started buying VIASP in January 2024 at 17.26 and have continued to nibble. My average cost is now 18.89. However, I only have a half-sized position. It’s risky enough that I don’t dare expand to a full position.
Anyone else getting the runaround from Schwab on the former, will be missed terribly, NSS. It was called yesterday (6/3). Fidelity was able to pay both principal and interest yesterday. Schwab credited my account with principal payment today (6/4) but not the interest, claiming “they have not received the payment yet”.
Either incompetent or trying to get an extra day’s usage of the cash
I got my NSS payment on the few shares I had left – $0.42 (IIRC) on 6/4
With all the chatter about the economy weakening, I’m looking at SPX, PFF, JNK and LQD on a relative comparison chart. For every large dip SPX made starting with the 2009 GFC low, PFF and JNK have matching dips. PFF and JNK look something like SPX detrended.
After the GFC low, PFF had an incredible rally and stayed ahead of SPX until May 2013. A similar but less potent PFF rally followed the March 2020 low.
Starting the chart at the fall 2007 SPX high reveals that PFF lost 69% with SPX losing 57% in the selloff to the 2009 low. LQD also dipped but bottomed in October 2008 with a 19% loss. LQD peaked in August 2020 with a 83% gain from the low. By comparison PFF rallied from the 2009 low to the May 2013 high for a 191% gain. Starting at the 2007 high, it took SPX until October 2013 to outperform LQD. Most of the time period I looked at was during ZIRP. Currently LQD is trading at levels similar to fall 2007, after adjusting down to conform to the post-ZIRP rate environment.
During a serious downturn, a portfolio of IG bonds looks likely to produce the lowest drawdown. The biggest gains come from buying beaten up preferreds at the lows. But you already knew that!
08-09 crisis was definitely bad, but even worse on financials. Most have been redeemed, or renamed, but many of the big bank $25 preferreds dropped well into single digits. Utilities suffered but not to same degree, take UEPEM which I recently reentered buying a little slug at $64 recently. It briefly dropped to under $62 at its low point but rebounded back near $70, before flying higher during ZIRP. But yes definitely preferreds typically in general are no place to hide heading into an economic stress situation. Look at Covid. Heck preferreds got pounded significantly harder than market in general.
PFF or PFFA might be a good play at a major low on the assumption that stocks in the etfs that were weak and failed would already be weeded out.
PFXF is another option to trade if you wanted to not be so financial company centered.
I bot al/pra floater at 25.21..annualized dividend currently 2.37 for a 9.40 yield…good article dtd 10/4/23 on S/A Air Lease Corporation: I Still Prefer The Preferreds
I bot MITT/PRC at 24.11 which floats 9/17 at sofr plus 6.48 …I presume it will trade if not called near or above 25 which would imply over 20% ytc ..good article on S/A DATED 2/14 titled AG Mortgage Investment Trust Preferred Stock update
My aging eyes might be overlooking it, but I’m not seeing CGBDL on the baby bond lists.
Eyes seem good.
Also- NEWTG is only in new issues.
Schwab posted my EBBNF and EBBGF dividend payments but skipped paying EBGEF (which I have owned since 2023).
Anyone else get hit by this? My goodness Schwab truly sucks. Have no idea why I have been loyal to these bozos for decades.
Also – Has anyone on Schwab been given an actual cutoff date for their transition to Think or Swim? They originally promised 60 days notice but my guess is that promise has gone by the wayside by this mostly clueless broker.
i have transitioned from TD to Schwab for TOS without hitch
yeah, me too. No dividend for EBGEF, whereas EBBNF and EBBGF were both paid on time. The only thing I can think of is that EBGEF past its conversion/reset date at the beginning of the quarter. Not sure why that would cause a delay, though. I have my guy at Schwab looking into it.
So the Schwab broker told me this afternoon that Schwab had not received payment for EBGEF. But just now, it shows up on my transaction record as credited on 6/1/24. So there you have it!
Thanks for pointing this out, KT….. It’s happened to me too…. EBBNF and EBBGF paid, nada for EBGEF. At least the amount of Cdn tax they withheld turns out to be accurate………. I’ll get that back come tax time.
KT,
Fidelity credited both my EBBGF and EBGEF at the same time yesterday.
I bot 50 shs of NEWTG last Fri at 24.75. Yesterday I had an alert that I had just bot the same- looked at the portfolio- had a $25 commission attached! Call Schwab & thought it was all straight- $25 gone. Then this am–same damn thing on my phone. Sent them a letter that better get them moving within 24 hrs, not the usual 2-4 days– advised that I can move to my Fidelity accts.
Lots of strange crap going on, even before the TOS transition. Also weird- TOS does not have a CD or Bond section according to her- huh!
Gary
Ditto on the spurious double email and the $25 commission
Schwab explained that it was only this one Newtek security that was screwed up, so the trades on 5/31 weren’t recorded right, so the back office brokers had to input the transaction manually, which resulted in the softward automatically applying a 25 commission. Rep said they are working on it and it should be cleared by Friday.
Steve
Steve
After seeing your post I checked and sure enough, $25 commission so I fired a message to them about it. But your letter sounds like a better idea. Can you share the addressee details?
Thanks.
FWIW – They have not even “officially” mentioned to me that I will have to transition to ToS.
I asked about it the other day when I was on the phone for something else, and the Schwab gal said (1) the transition is going more slowly than planned, and (2) “active traders” have been moved to the back of the queue.
One of these days I need to open ToS, but I haven’t yet. I hate learning curves…
I was told you don’t have to use ToS you can use the basic Schwab website. I like simplicity. Give me a good watchlist I don’t need all the bells and whistles most of which I won’t use. Now I do my research and watching elsewhere and have schwab on a separate computer for when I want to trade something in that account.
I find myself using the Schwab basic watchlist on their website instead of ToS. The watchlists went to their website without me creating it.
https://www.fdic.gov/news/speeches/fdic-quarterly-banking-profile-first-quarter-2024#:~:text=Unrealized%20losses%20on%20available%2Dfor,quarter%2C%20drove%20the%20overall%20increase.
Reading material to go with your morning coffee.
merci buckets
@August West, you posted back on 30 may at https://innovativeincomeinvestor.com/treasury-auctions-are-worrisome/#comment-118754 that “FHLB notes will go down in value when rates go up and due to the embedded call option they are likely to go down more than Treasuries of equal duration.”
Can you tell us (okay, me) again what you mean by ’embedded call option’?
@Bur AW Others
I think this may be what you were referring to?
If I remember correctly Frank Fabozzi said that the value of these types of bonds increase when the current rate is higher than the coupon. The reason for this was the loan was less likely to refi’d.
On the flip side when rates go down then that call will tamp the price down. It will be more likely that the loan will be refi’d at a lower rate.
Now on the embedded call option I’m a little fuzzy on. If there is a refi provision then that certainly an option. Here’s where my mind gets foggy, the issuer’s right to call before maturity is also an option from what I remember.
Could have been titled, “Something’s Gotta Give”
A brief narrative on the unsustainable state of deficits, spending and taxes. Best read with immunity to the political finger pointing,
Best to all.
https://www.morningstar.com/news/marketwatch/20240603146/your-taxes-will-likely-have-to-go-up-despite-bidens-400k-pledge
added a little SLG-PI 6.5% at 21.20, 7.65ish yield..in the Roth.. Marc Holliday is magic in office of course A+ newer buildings in Manhattan.. 3%+ over 10yr rates and 2.5%+ over cash, I am ok for a little juice here. DYODD. Bea
Never heard of this Eaglemark Savings Bank – 2yr CD 5.05%
Surprise (to me) ! It’s part of Harley-Davidson Finance
My second largest holding has been AGMPRF
It only paid 5.7% but I considered it a bedrock safe issue.
Its price bounced around in 2024 from the 20’s to mid 21’s.
I was somewhat underwater before last Friday.
On Friday at 3:55 10,000 sold in the 22.60’s.
Someone’s month-end rebalancing.
Today some early birds (including me) captured Friday’s price
It is now down to the $22.50’s. – a yield of 5.6% – but still higher than it has been all year.
Westie, I bought at a lower price to yield 6% I am comfortable holding. I assume you have been watching and waiting to unload but considering the history I wouldn’t be surprised if you got back in at a lower price point in the future.
Charles
Yup – I will buy back in when it sags back into the 20’s.
However, I think I can do better than 5.6%.
Plus, your comment that you bought lower so it yields 6% seems contrary to what we have been sharing on this site:
Yield has to be thought of in terms of the present price, not based on what one purchased it for.
BUT, I know you are a pro.
You like AGMPRF, as I do, because it is a stable, reliable holding.
Balances out our more risky ventures.
I bet it’s no surprise I own AGM-C not F…… more my style, right AW? Having bot lower, I figure in another 2 weeks I’ll know if it’s going to be called or will begin to float even though it is callable at any time after 7/18, not on any payment date only…..
When they declared their dividends they included this statement:
Farmer Mac also announced that it intends to provide notice to the holders of its Series C Preferred Stock of the redemption of all of its outstanding 3,000,000 shares of Series C Preferred Stock ($75 million). All shares of Series C Preferred Stock are issued in book-entry form through the facilities of The Depository Trust Company (“DTC”). Farmer Mac will provide written notice of any redemption to the holders of Series C Preferred Stock between 30 and 60 days before any redemption date according to DTC’s procedures. Any redemption of the Series C Preferred Stock will not affect the payment of the dividends declared on the Series C Preferred Stock on July 17, 2024 as described above.
2wr—I own agm-c and I thought it had already been given a call notice. Not completely positive.
You’re both right… And I knew it! It took so long for Mr Market to figure it out, I kept getting hit with more day after day so I didn’t think about knowing what I and you know before writing what I wrote… Thanks to both of you! In fact, I still have a standing bid in at 25.13 but I wasn’t the one who got to buy today…. Nuts! Talk about a good MM alternative! At 25.13 the YTC is over 8%, isn’t it?
Westie, I probably mis-spoke. Actually sure I did., if not I still will own it. I could confirm what yield I am getting on the purchase price but I don’t do banking or anything with my accounts on a mobile phone. I’m like 2 white roses. With my wife’s account she is no longer adding to her IRA so I have x amount of money. Kinda like having a budget and going grocery shopping. You have a list of wants but are limited by your funds.
What I do is use Quantum and look at a preferred I like and see what the dividend is than I figure out at what yield I would want to own it at and I work out the price I am willing to pay. I put in a GTC and let it set out there. Could be 6 months or maybe never. In the meantime the money sits in SPAXX earning about 4.5% I am not into squeezing an extra 1/2% or so on the cash. It’s not locked up and is immediately available and I don’t mess around with moving it around. Why I like Fido more than Schwab.
You’re wondering why I look at it this way is because I am trying to be more of a buy and hold with my wife’s account and I look at more of what the income is. Not the current yield based off the stock price. I pay attention to stock price if it gets too ridiculous a premium and the risk goes up of it getting called.
FSK Prices Public Offering of $600 million 6.875% Unsecured Notes Due 2029 – FYI
https://www.bdcinvestor.com/fsk/202405/fsk-prices-public-offering-of-600-million-6-875-unsecured-notes-due-2029/
Z, quite a list of book runners for this offering. Expect a lot of clients will be asked by their brokers to invest.
Thinking the unthinkable. Jeff Gundlach of Doubleline Capital did a podcast with David Rosenberg a few days ago. My assumption is that you know who both of these gents are without elaboration. Jeff had what he admits is a radical possibility that most of us would think could not happen. As the interest payments on the US national debt increase, he thinks it is possible that the US treasury might come in arbitrarily and say something like: “For all UST’s with coupons greater than 1.0%, we are changing their coupons to 1.0%.” So you think you have a 5% UST and it becomes a 1% overnight. So you say this is illegal. He goes through several cases where the government kinda ignores legality to make financial changes.
His solution is to load up on zero coupon UST’s thinking that would not suffer if higher coupons were lowered.
If he was some kind of Tik-Tok/Instagram influencer suggesting this, you would immediately write it off as quackery. Jeff has a little more credibility than that. Obviously not a concern for today or tomorrow, but in our kids or grandkids lifetime, not out of the question. We do not have any affiliation with either of these two men and/or their companies.
The spam blocker will not let me post a link so you will have to Google it. . .
Dear goodness, don’t give the government any ideas Jeff!!
If USTs all go to 1.0%, what would happen to all of Grid’s illiquid ute pfds, now 30+% under call and yielding ~6+%?
Asking for a friend. 😉
Grid will be creating a bubble in the price of Shipsticks deliveries to Hawaii if that happens….
It would be a miracle! But for me its simply why own a “high quality” 6.25% ish issue near par, and risk a call down the road, when one can have a HQ 6.25% ish over 30% under par.
Tex, I’m thinking really hard about the possibility. Okay, done.
There are no zero-coupon Treasury securities beyond 52 weeks (that is, Treasury bills). The zero-coupon securities marketed as STRIPS are actually issued by dealer banks who hold underlying true Treasury securities and just pay out the coupons and principal values of the underlying securities to redeem separate issuances. For example, a 10-year Treasury with a 5% coupon might pay $100 in ten years and $2.50 every six months until then. In a STRIPS, a SPV might own the $100 bond and then issue perhaps 21 zero-coupon STRIPS securities: one for each coupon, plus one for the final principal. If the Treasury reset coupons, presumably that would just impair all of the STRIPS backed by coupon payments. If the government were to make exceptions for bond backing STRIPS issuances (which might bear the same CUSIP as Treasury securities held by the public), then presumably they could design the exception to reduce the IRR of the STRIPS so that it’s not truly “safe.” So, no go.
Yes, I have noticed the government ignoring legality is becoming a trend.
So no kids no worries? Hope so
If anyone wants to dabble with STRIPs, I would suggest only nontaxable accounts. Unless dealing with phantom interest at tax time annually, 1099 OIDs etc. is not something that bothers you.
So I got the Rilyo redemption in fidelity and they filed the delisting form with the sec, but no redemption at Schwab. Anyone else have trouble?
I believe Schwab waits until the third party pays them before updating your account whereas Fidelity anticipates the payment and updates your account before they receive it. If there really is a problem on the third party’s end Fidelity will take back the payment from your account. I prefer this method over Schwab’s method, but in either case you’ll eventually get paid.
I am considering buying a preferred offered by Fifth Third Bancorp.
It is FITBI paying 9.15% current yield.
It is post call. It is Non cumulative.
Originally issued at 6.375% and now floating.
Float is three-month LIBOR (which is currently 5.3ishh) plus 3.71 = approx 9%
Dividend resets quarterly,
Currently, a scosh above par at $25.63
It is perpetual with no maturity date.
I am somewhat new here. I bought preferreds a number of years ago when rates were better and I am considering getting back into income investing. I originally read the CDX3 book and that author did not buy convertible preferreds. Nor did he buy Non-cumulative.
Any thoughts on the risks involved. If rates go up or stay the same they can call it. If rates go down, I could be stuck with this for a long time, but rates would have to go down several pints it would seem.
Any thoughts?
A lot of moving parts here. I will only tackle a few. As you probably noticed the “live floaters” generally pay significantly more than the fixed perpetuals. This is the market telling you it doesn’t think the Fed rates ( which directly effects SOFR) will stay high long term. So there is a little baked in the cake pricing going on.
The non cumulative is largely a fake news non factor. Since 75% of preferred world is financials/banks most preferreds dollar wise are non cumulative anyways. Personally I don’t currently own a non cumulative after selling a Brighthouse preferred Friday on a 6% bounce. But it’s largely because I generally have a ute bias. Non cumulative is not a license to screw preferred holder over. They just don’t do that. It happens when you buy a stressed company.
Interest rate risk is one risk. The other is the risk of underlying business. Regional banks have their own set of risks. FWIW if I were to purchase a bank preferred stock I would only purchase a too big to fail bank such as C, GS, MS, JPM, BA that trades at a good discount and has a fixed coupon.
All bank preferred stock that has been issued since Dodd Frank is non cumulative. This has to do with how regulators compute bank capital ratios.
To Grid’s point the decision between non cum and cum is really a bit moot. If you are looking at a bank or an insurance co you will be dealing with non cumulative. If you are dealing with a REIT, CEF or BDC it is generally cumulative.
A 10% yield looks good, but this is tied to a very short term rate which will change as soon as The Fed changes the Fed Funds rate. For the record I do have some floating pref. issues, but do expect the yields to drop when (if?) the Fed cuts the funds rate.
A good way to get started would be to pick a fixed coupon pref in a TBTF bank that trades at a nice discount to par. This way you have minimal call risk and the potenital for a capital gain if The Fed does start to cut rates.
The FDIC is not going to run into C, JPM, MS, BA, GS on a Sunday just before the Asian markets open, shut them down and mark the common, preferred and unsecured bonds to $0. That can (and recently has) happened to any number of regional banks and we can expect more of it in the future.
I just think regional banks are not worth the headline risk – personal opinion probably not shared with most on this site.
MN Jack I assume you have just found this site. There has been a lot of talk on here about floating rate preferred and the risks associated with regional banks in several of the forums here. Grid and August have outlined most of the risks. Right now, the biggest risk has been commercial real estate loans that banks hold. This doesn’t apply to all the banks. No one knows how this will play out and for how long, especially as banks have been doing extend and pretend such as modifying loan terms. We are only 1/2 way through 2024 and it’s been said 2026 to 2027 could be the peak in failed commercial loans. Unfortunately there are no laws holding owners responsible and they can just turn over the keys and walk away. It has been said several times on this site you need to go deeper in depth in the financials of the banks you’re interested in to see what loans they actually hold. Take a look at this list for some of the to big to fail banks with floating preferred.
https://innovativeincomeinvestor.com/floating-rate-and-fixed-to-floating-rate-preferred-stocks/
AW – when you argue, “A 10% yield looks good, but this is tied to a very short term rate which will change as soon as The Fed changes the Fed Funds rate. For the record I do have some floating pref. issues, but do expect the yields to drop when (if?) the Fed cuts the funds rate,” you must be considering only current yield at purchase price on your fixed income alternative, not current market price on it because as the Fed changes Fed Funds rates downward, so the current yields available on the fixed rate alts will come down as well… If someone is looking from solely a point of view of coupon clipping income and not capital gains potential, let’s assume your floater is providing you with somewhere in the range of 150 basis points advantage vs its fixed rate alternative…. I think ALL-B might be an example of that.. So you are gaining a substantial advantage to own the F/F over an unknown period of time…. When (or IF) Fed Funds rates come down, so will the market current yield available if you’re in the market then on the fixed rate as the price goes up. But what happens to the F/F issue? The real risk for it will be having it called out from under you because as Fed Funds rates go down, I theorize the pinned to par aspect will make that spread advantage actually grow larger, not narrower (provided no call). So your current will go down on the F/F but not down as much as the current on the fixed rate issue alternative. Your advantage in owning the F/F issue remains but at lower currents for both.
Then what about if you’re wrong? What if rates don’t come down and they actually go up instead? Mr. Market will provide you with an increased current yield on the fixed rate issue but at what cost? Your market price will go down substantially.. The F/F issue will remain stable in price and will go up in current yield as well, right?
So to me, and you’re right this is all just opinion vs opinion, in today’s world you’re compensated substantially when owning the currently floating rate issues unless part of your plan in owning is to capitalize someday on possible price gains on fixed rate, particularly discount fixed rate issues, and you are not concerned about possible substantial price losses…
just another view..
Hi 2W
Thanks for the response.
Let’s see if I can explain my thinking a bit more clearly.
Lets assume the Fed drops the Funds rate by 50 bps tomorrow.
Further let’s compare
a)Callable floating rate perpetual preferred tied to SOFR currently trading at par with a 10% coupon. Lets assume current yield is 10%.
b)Callable fixed coupon perpetual preferred currently trading at a discount to par with let’s say a 7% coupon. Lets assume current yield is 8.75%.
c)5 year fixed coupon IG note trading below par.
Note this comparison is impacted by how the yield curve reacts in terms of shape to changes due to the change in the Funds rate.
I have all 3 of these scenarios in my portfolio today.
a)
We can say with relative certainty that the coupon payment on a Floating preferred stock tied to SOFR will drop by 50 pbs from say 10% to 9.5%. Given the hypothetical Fed action.
We don’t know what will happen to the share price. It may drop and it may stay the same. It probably won’t go up much as it was trading at the call price before the Fed acted.
b)
We can say that the value of the preferred will likely go up, but we don’t know how much. It is unlikely to go up enough to drop the current yield by 50 bps. The yield on this security is levered to what the 10 year does in reaction to the cut and not SOFR. My expectation is that the yield spread on this security over the 10 year yield would remain constant, but I don’t know this for a fact.
c)
This will likely move up (or down) in value such that the spread over the 5 year note remains roughly constant.
Now let’s consider what happens if the Fed increases rates by 50 bps.
a)
Coupon will certainly go up by to 10.5% and current yield also ges up to 10.5% as the secuirity is unlikely to go up past par value in a meaningful way.
b)
The share price will change and impact the current yield. The direction for the share price is totally dependent on how the 10 year reacts to a Funds rate increase. The 10 year could just as easily drop as increase in yield.
c)again this will likely move up or down in value depending on how the 5 year reacts.
What are your thoughts on these scanarios? Have I missed something?
OK….Let’s just throw out the comparison to 5 yr fixed rate IG trading below par for simplification’s sake… We didn’t start with it, so let’s leave it out.
I don’t disagree with anything you say other than thinking that the F/F issue could possibly drop in the scenario basically because of what you’re assuming for the 7% coupon originally trading at a discount to give current yield of 8.50%. If it’s price is not likely to go up enough to increase its current by 50 basis, then, just as I theorized, the spread advantage of F/F vs fixed will INCREASE in the scenario…. That makes it an even more favorable buy vs the fixed rate even when rates go down by 50 bases, thus putting a floor on the price despite the drop in current. Now what we haven’t theorized about yet, though, is what happens when the yield curve normalizes? That would mean SOFR drops dramatically more than yields in general so that will have a more dramatic impact on the F/F issue…. I’m not sure what to expect for F/F then.
So I really think we’re agreeing on the scenarios and for the most part what would theoretically happen to prices of both…. To me it boils down to the desire for possible capital gains vs the inviting current yield advantage afforded F/F in today’s market….. It’s not like one is the right one and the other wrong – their appeal is to different buyers overall but like you, it’s good to have exposure across the board…. I am of the camp, however, that lower rates are not a given and the risks of owning discounted perpetuals are real for possible depreciation from interest rates… But then again, I’m always saying that so maybe Buddy Holly has it right for me – https://www.youtube.com/watch?v=umPKhs17DmE&ab_channel=BuddyHolly-Topic. That’s where the 5 years come in….. I’ll take my discounted fixed rates in the shorter maturity range that you brought up, where I don’t have to worry that much about being wrong on rates.
I don’t think I fully undertand the comment as it pertains to the change in share price of the F/F issue when the funds rate drops by 50 pbs.
A lot (perhaps most?) of the pricing behavior of F/F issues trading at par depends on the valuation of the embedded short call option (IMO). Right now, it seems to me, that the Delta on this option is -1 (IMO) such that gains (losses) in the share price due to changes interest rates are offset by losses (gains) in the value of the call option. As long as this delta is -1 (which my gut tells me it is) then the share price will be pegged at par. The relationship between the value of the a straight F/F preferred near par and the value of the call option near par is a dominant factor in the value of the preferred shares. My *guess* is that for a 50 bps move either up or down the delta of the short option will remain close to -1 and the value of the preferred issue will remain close to par. However, the delta may change from -1 to say -.8 thus the share price could drop if interest rates drop.
As far as the normalization of the yield curve goes – impossible to predit. There are 3 ways that the YC can normalize:
a)Bull Steepening. Short term rates drop due to Fed cutting the Funds rate.
b)Bear Steepening. Long term rates increase which could occur by a combination of factors to include inflation expectations and degradation in credit quality of US debt.
c)Combination of both (I think this is likely what would happen if YC normalizes).
My personal assumption is that the Fed will cut rates for political reasons (and because UK and ECB will be doing it…) in 2024 and that inflation will accelerate (Fed does not care IMO). In 2025 the Fed will have to deal with getting infation under control again (maybe they will deal with it maybe they will reationalize it).
I always try to keep in mind that inflation helps them get out of the debt problem… So if they admit it or not, they like/want/need inflation.
Assuming that F/F issues remain fixed at par it is best to own floating rate issues in any of these normalization 3 scenarios. It remains to be seen if the YC actually does normalize anytime soon, however.
Anyway all this fixed floating stuff is complex. For an investor new to preferred stock looking to pickup yield perhaps it’s best to lock in a solid fixed coupon at an attractive CY with a high quality preferred stock in a solid TBTF bank that currently trades at a nice discount.
OK, ’nuff of this I suppose…. We’ve beaten this topic up pretty good I think…on to the next…. lol. We may come to slightly different conclusions as to what to do regarding all this in today’s environment, but I think we agree that we agree that as you have done in your own portfolios, there’s an arguably good reason to own all three today without pause… . we’re probably only talking about degrees of exposure and risk tolerance to determine percentages of each. And Delta/Schmelta, lol, I think I’m more seat of the pants thinking about what motivates a buyer to buy and how those parameters would change in a downward changing interest rate environment instead of actually trying to analyze the value of an embedded short call, but I bet I incorporate it intuitively anyway… who knows
Nothing wrong with buying a non too big to fail bank. As with any investment, it depends on the risk and reward. Some here have an irrational fear of non too big to fail banks but then invest in riskier other sectors. As Grid noted, the non cumulative aspect is just noise.
The key is knowing what you own. Some banks are riskier than others – just like when you compare a variety of stocks. Research and understand the financials of the bank you are buying the preferred of. Look into where their exposure may be if their is a CRE issue. And assess your own risk tolerance vs potential rewards
I own a number of non TBTF bank preferreds. But I also practice more much diversification than I suspect many do on this site – so if one of my unsuspectingly investments blow up, it will not have a big impact overall
Maverick, I’m in the same camp as you. Nothing is really safe. 2007 to 2009 showed that. they added more banking regulation then turned around and weakened it. Is a banking crisis going to happen again? history says yes. Is it going to be the next crisis ? I don’t think so.
https://www.msn.com/en-us/money/savingandinvesting/a-financial-storm-is-coming-that-governments-cannot-fight/ar-BB1nthfw?ocid=hpmsn&cvid=412504e56f0847e69b9efaca59b47358&ei=158
We all know about Shadow banking and Private credit. Talk about something not regulated. The A&E I referred to in regards to commercial RE loans is mentioned in this article. I recently read about Blackstone turning over the keys to 1740 Broadway in NYC that is mentioned in this article, what I didn’t realize is part of the debt was bonds rated AAA that were wiped out.
I remember 10 or more years ago when I was investing in APO, EFC and PSEC hearing about these Amend and Extend tactics. They had loans that were in trouble with xyz companies so what they did was loan them new money to pay off the old loan and start a new one. What makes a lender think that a new loan has a better chance of getting paid if the old one wasn’t? But on the books it looked good because a loan was paid off and the new one is current, at least for a short time.
If anything, I think this could be the next crisis not regional banks. Maybe 10 or 20 banks fail, but there are thousands. One or two of these PE or PC companies fail your talking about another Lehman Bros. moment.
For those of you who travel abroad and who buy travel insurance: do you have any recommendations, either in terms of the company you use or the type of plan you buy?
Bur have you tried AAA?
I use Generali. Typically they have 3 tiers and I buy the middle tier. They also have add-on coverage for car rentals, etc. Used the insurance once and they reimbursed all expenses such as purchase of additional flights, missed hotel stays, meals, etc. You do have to provide all documentation and receipts.
Get the chase sapphire card – it includes much coverages you’d need to get externally, and they are included. Also has some medical coverages etc.. I used it for work and it is very effective. Other cards used to do this but many have dropped the travel and health coverages as “included”.
and no “foreign” exchange add-ons.
Chase United Explorer has similar insurance to Chase Sapphire Preferred, but has the advantage that the first year’s annual fee is waived, plus free checked bag and priority boarding benefits on United.
https://www.chase.com/personal/credit-cards/united/united-explorer-card/travel-protection
Of course if you want “Cancel For Any Reason” coverage, that’s a different story and will cost you.
https://thepointsguy.com/guide/independent-travel-insurance/
https://thepointsguy.com/guide/cancel-for-any-reason-trip-insurance/
I actually just returned from a cruise where I racked up $557 worth of medical expenses for a stomach ailment. I’m in the process of filing a claim with John Hancock travel insurance. I can report back with how the experience goes.
Ray, my wife had a bad case of poison oak before she went on her cruise. She saw the doctor on board ship and filed with Medicare after she got back and is still waiting for a response.
Ray, do report back if you find the time.
An update…
John Hancock has outsourced their claim support to some operation called StarrTravelClaims. I talked to them and they won’t process the medial claim until I first file with my employer’s health insurance (Cigna) and let it get rejected. The lady I spoke to acknowledged how dumb this is (my personal health insurance isn’t going to pay a foreign claim anyway) but said that’s the rule. Anyway, I filed with Cigna and they said it’ll be up to 6 weeks before they reject it. I should know more in July.
Typical insurance shenanigans: they are in business to deny and delay claims, not pay them.
Can anyone point me to Edison International’s approach to LIBOR replacement for SCE-H, SCE-J, and SCE-K?
In particular, have they announced whether they’ll keep the pre-float rate fixed or instead use SOFR+adjustment?
I poked around on their IR pages but couldn’t find anything (probably staring me right in the face).
What to do when you can’t sleep? Try to find a document on issues I couldn’t care less about: https://download.edison.com/406/files/202301/libor-act-implementation-for-sce-preference-stock-trust-preference-securities-20230120.pdf?Signature=AnH73OzoDJYKF4q86B7c7hGx4rc%3D&Expires=1698481604&AWSAccessKeyId=AKIAJX7XEOOELCYGIVDQ&versionId=_0sbF_YfiNU.fad_jVJLT7c2wY84eYAZ&response-content-disposition=attachment
g’nite
Ha! Thank you sir. Who would have guessed that a google search for “how will edison international adjust dividend for preferred stock after libor” would turn up the very document I was looking for? doh
The direct answer for anyone skimming these posts and not wanting to follow the link is that Edison is maintaining the float for these issues (not fixing the rate), and replacing 3ML with 3MSOFR+tenor spread (0.216161%); i.e. they are “using three-month CME Term SOFR plus a Tenor Spread Adjustment for three-month USD LIBOR, which is equal to 0.26161%, plus the series-specific spread as set out in the prospectus.”
A lot of big percentage gains in preferreds today. AGM-F +12.7% takes the cake. A weird day. End of month?
AGM-F surprised me today. I bought a bunch when it dropped below $21 earlier this month. I put a “stink” GTC sell order on a couple hundred shares at $23 (I sometimes do that just to catch the odd fat-fingered buyer).
Shocked me when it filled at $23.29. Always happy to take a buck and a half for owning for a couple of weeks.
This tweet from Michael Howell, the liquidity guy, is about hidden yield curve control in US treasuries, which he estimates at 80bps. Just a chart, no explanation.
https://x.com/crossbordercap/status/1796473792501575792
I don’t have to agree with Howell or understand his methodology to believe that Fed and Treasury both would like to keep long yields from running higher. Is it possible that they are suppressing yields?
I’m trying to understand the difference in risk between CEF Preferred’s and CEF Baby Bonds and how this affects yield. In general the preferred issues yield slightly more, which implies they are riskier. But with the coverage guarantees of the 1940 act, I’m not quite sure why. I feel like I’ve even seen something that suggests the preferred should be slightly safer because of extra protections.
Let’s try a specific but representative example. OXLC is a CLO ETF with both preferred and baby bonds outstanding. OXLCP is a term preferred due in early 2027 with a YTM of just about 9%. OXLCZ is a BB also due in early 2027 with a YTM of just about 8%. What’s the case in which the BB gets paid off but the preferred does not that justifies the 1% extra yield? How is the fair price for this difference in yield determined?
Thanks!
good comment ..excellent explanation by analyst on S/A with moniker of “Preferred Stock Trader” in article titled Bargain 8.8% Eagle Point Term Preferred Stock: Antidote to Reinvestment Risk” dated 4/23/2024 which documents and agrees with your thesis
Can a term preferred not get paid off?
There is a provision in the prospectus for voting on the matter – a change in redemption date must be unanimously approved by holders of the class of shares. My read is that it would be a default if they did return par at the maturity date w/o such a vote.
Personally I own OXLCN and ECCC
The BB is contractually required to pay quarterly interest payments and it is not at the dicretion of the board.
The Preferred dividends have to be approved by board and declared every quarter, and they do not have to pay these dividends if they are not paying dividends on the common.
My reading is also that there is mandatory call based on asset coverage on the Preferred that does not exist for the bonds. I view this as good for preferred shareholders. In practice, however, I don’t know that it will really matter. I suspect both the bonds and preferred will get clobbered.
When I net these 2 out, I still want a premium for the term preferred.