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Still Plenty of Fear Out There Today

Irrespective of the 10 year treasury being at 3.48% there remains plenty of ‘fear’ from income investors–not about interest rates.

Generally we have prices that move with interest rates from the preferreds and baby bonds–but there are times–like now when the baby gets tossed out with the bath water as folks say ‘let me out’!! Quite obviously we are in the soup until we gain back a level of confidence in the banking system–and that is still weeks away. First Republic (FRC) is gyrating as the BIG banker talk of further actions.

I noticed someone snagged some of the Tri-Continental 5% preferred (TY-P) today at $47.29. Unfortunately it wasn’t me but 1,319 shares changed hands–heavy volume for this one–looks like a ‘get me out’ trade by the seller. I do have a G-T-C buy order in at slightly lower levels.

Just reviewed the CD rates–mostly out of curiosity, because I am not looking for more of them. Yields are off maybe 20-30 basis points depending on the maturity date and call protection provided.

So I am watching but not acting–need a bit more market confidence, but there are a number of utility issues I am watching and will write about in the next few days.

24 thoughts on “Still Plenty of Fear Out There Today”

  1. I have some notes maturing on Thursday which I want to replace with a 5 year maturity. Looking at the 6.25% Coupon 2028 FHLB (CUSIP 3130AVDG4) notes. They trade just over Par and have a YTW of 5%. I realize that FHLB seems to randomly call notes and then issue exactly the paper…

    Any better ideas out there than these that I might have missed?
    I am willing to look at CDs and go down to A- credit if the yield is there.

  2. I don’t own any of their financial issues, but I am still very nervous about the First Republic crisis. It could still easily go under and take down other financial firms with it as the contagion spreads. Although current yields on many good quality financials are great, I’m very hesitant to buy at these levels. I’ve been selling some where I am even or have only a small loss and building cash. The more government speaking heads claim that everything is fine, the more nervous I get. I really hope I’m wrong and everything will settle down this week.

      1. I wish they had this listed for all banks, not just the top ones. For example, Synovus, as I’ve been looking at SNV-D, a FTF that starts floating in June. Anyone own this and have any thoughts?

  3. CHSCN looks like a decent choice the only wrinkle is that the float is capped at 8%. See a lot of floating issues with floors but not too many with ceilings.

    1. I added a little bit to the small pile of CHSCN that I have…
      I love their story…I feel comfortable owning it…even with the Cap

    2. I have CHSCN also. But the cap isn’t the only wrinkle. Read the prospectus about what happens when 3ML goes away.

      1. “…or, in the case of the Dividend Period commencing on the First Reset Date, 2.802%”
        That one ? I don’t follow what that means- seems to skip all prior verbiage.

        1. LIBOR is going away…
          US 1-month, 3-month, 6-month, 12-month LIBOR will be last published on June 30, 2023…
          It is moving to SOFR…

          Check this article…one of many available online

          Checkout the last bullet point on the last page:
          For all other LIBOR contracts, including consumer loans, SOFR (in place of overnight
          LIBOR) or term SOFR published by CME Group Benchmark Administration, Ltd. (in place
          of one-, three-, six-, or 12-month LIBOR), plus the statutorily prescribed tenor spread

        1. KJN,
          The last fallback in the CHSCN prospectus states that:

          … if fewer than two such rates are so provided, then three-month LIBOR for the Dividend Period related to such Reset Rate Determination Date will be set to equal the three-month LIBOR for the then current Dividend Period or, in the case of the Dividend Period commencing on the First Reset Date, 2.802%.

          The first reset date is 3/31/2024. There will be no 3ML quoted then. I would interpret that clause in the prospectus to be a “hardwired” fallback, which would take precedence over any 3ML substitute designated by ARRC.

          If this is correct (and I’m not a lawyer), then the reset rate at 3/31/2024 would be 2.802% + 4.298%, or 7.1% – not coincidentally the fixed rate in effect now. That then becomes the rate for each successive dividend period. In other words, I’m thinking that this might in reality turn out to be a fixed rate perpetual.

          That said, I don’t think 7.1% is terrible rate for a CHS preferred these days.

          1. nhcoast,
            IMHO, I think and hope that they move to the CME 3mo SOFR and not play games with the investors. They are an upstanding organization and I hope they do the right thing so as to not run into class action law suits.

            Eating Rolaids and hoping for the best

          2. nhcoast

            BTW, CHSCM reads the same way in regards to the “…Hardwired…” effect.
            2.595 + 4.155 = 6.75% which is the fixed rate…

            Essentially, as you said, a fixed rate perpetual…ARG!!!

            I was looking for a floater…

            1. KJN,
              I’m with you. I bought these as FTF too. But the prospectus says what it says. So I think they would be well within their rights to keep the rate at 7.1% come 3/31/2024.

              OTH, as a co-op, I’m guessing that a good slug of the preferred might be owned by members, and management might bend over backwards to avoid anything that might in any way be construed as being inimical to their interests. We’ll see.

    1. Financial engineering from 15 years ago.

      What could go wrong?

      Holders of these really got the bone. After last week of the SNB injecting liquidity nobody thought it could get any worse.
      Regulators and everyone else trying to keep everything calm on the surface has consequences. Nobody needs to worry because by the time you do it’s too late. Minimize the damage.
      Sneaky sneaky.

  4. I’m not sure if others have noticed, but PFF is right around its 52 week lows and not too far off from the March 2020 Covid lows.

    When you hear people questioning whether preferreds are investable currently, “fear” is probably the correct term…perhaps that’s a good indicator of a bottom forming.

    1. Here is a quick list of some that look attractively priced today that have nothing to do with banking:

      BC/A, BC/B, BC/C

    2. Dick, Mr Bear here, this is what I posted on January 21,
      Sell in January and go away, Chapter 2? One week ago on 1/14, I asked whether preferred investors should sell now and invest in CD’s/MM funds/UST’s for the rest of 2023. You would be guaranteed of at least a 9%+ total return for the year. Same question this week.

      The largest preferred ETF is PFF which started trading in 2007, so we have 15 years of data to look at. Year to date 2023, PFF has a total return including dividends = 7.92%. You could take that to the bank plus add on 4.08% in CD’s to GUARANTEE a 12.0% total return for the year.

      I do not remember if you thought back then I was being too bearish or not. Fast forward to today and PFF has a 2023 YTD return of -1.0%, so it is down 8.92% since then, plus you would have lost ~ 2 months of CD/UST interest.

      My pure guess is that most preferred investors will not have a >=12.0% return for this year unless they sold before now. My second pure guess is that PFF will fall further from here. So while you are a buyer at these levels, I would not be adding the broad preferreds like PFF. And yes, we do hold preferreds in many accounts and have taken a beating like PFF recently.

      I really hope this is close to a bottom for preferreds like you suggest, but I will have to take the under on that bet. . .

      1. I use PFF as my benchmark to beat being I am an income investor and I love beating a very low bar handily every year. That being said I was embarrassed end of January being up less than half that pitiful fund was.
        But normal order has been fully restored as I just leaked over plus 8% on the year yesterday and PFF has returned to its more traditional putrid level of around 0%. PFF benefitted in January greatly from the temporary rise of the zombie fixed rate 4%-5% perpetuals.
        But it then got smacked with 2 black eyes from double whammy of the return fall of the 4%-5% zombies and the unfortunate reality the fund is over 70% in financials. Im looking at buying more of a low coupon fallen angel myself today. But its easier being brave on a few when half my money is in very safe instruments now.

  5. Might be early but bought AGM-F and SR-A today, added to MGR and CHSCL. Too much idle cash.

  6. Picked off some CUBI-F at 18.10. Current yield is close to 13.5%.

    Maybe folks know more than I do, but the financials seem decent enough and the CEO bought $500k of the common last week.

    1. I think CUBI is no immediate danger of a liquidity crunch. I recall seeing their uninsured deposit ratio is just over 50%. Per the Q4 investor presentation they had $9B in available liquidity and deposits of $18B. Maybe this is why the CEO just bought $500k of the common.

      1. I sold 600 shares of CMRE Preferreds and bought a 350 shares of SR-A, not at the lowest price but close enough. Then I bought 200 shares of SAJ, baby bond of SUR (Sarogata) small but agile BDC. Plus 200 shares more of CHSCN. These farmers are reasonably honest. No corporate mumble jumble. I cannot believe that East West Bank Shares (EWBC) got itself on the list. Then listening to Rick Santelli, a very conservative and good Bond analyst in CNBC, I believe that the Feds should STOP raising making havoc to the economy as opined by Mr. Santelli. If they go overboard, they will need to reduce the rate very quickly and cause more problem. Costco food price down significantly. Chicken, Dungaress Crabs too ($4.99 per lb in one local Vietnames supermarket).

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