Once again yesterday we saw a pop higher in interest rates, as represented by the 10 year treasury, to the 4.34% level which was up 9 basis points from the Friday close. Apparently the highest rates since 2007 and up hugely this month. When I look at rates – to my old brain, they aren’t historically high – maybe we should have them this high (or higher) for the next 10 years?
In spite of higher interest rates the S&P500 shot up by about .7% which was a darned nice gain considering it all came in the last 1/2 of the trading day. On the other hand I have been watching REITs fairly closely – an area I am likely to play in before too long (who knows when that will be). I watch the tone of the REITs through VNQ. 1 year ago this index was at 95 or so and now it is at 79 – almost a 20% capital loss. I haven’t tried to drill down on individual issues yet, but probably should start to build a watch list.
I just checked CD rates on Fido – still in the 5.50% area for a 1 year (callable) from JPMorgan. Once again I will be seeing a fair amount of maturities in CDs and treasuries in the next 6 weeks and decisions have to be made – rollover the maturities or deploy elsewhere? I have no answer yet since I want to see all the data up until I invest, but my guess is we are going to have these rates or higher for a while–no rush to make a decision.
I likely will do no buying this week since I will be out of the office quite a bit and the odds of me placing trades on my iphone are pretty small, but before leaving the office I may place a couple good til cancelled sell orders today to unload a few small bankers. I have watched some capital gains in these bankers drift away and they may not return for quite some time – I can still lock down some modest capital gains (along with the dividends received).
Tim, at E-Trade today I purchased some JPM 5 year CDs with a 5.7% coupon. An outlier issue for sure compared to the rest.
legand.vs—guess I should have checked my etrade account instead of Fido–checked just now (5 pm central) and 5.5% is the best offered.
Hi All, Tim, in the past you mentioned that tri continental ty-p was your number 1 traded preferred offered by a CEF.
it’s share price is taking a hit, well below par
in your opinion has anything changed with the company or is this just because of the low coupon
It is the low coupon.
History has shown this preferred can go MUCH lower though. I would guess a lot of it is in strong hands who have no need to sell as well as the downward trend taking a while to happen. It also tends to catch a bid quickly until that enthusiasm gets exhausted. I would not mind owning some but closer to 40.
fc–yes–way back when it traded as low as 15-18 in the early 1980’s. Safe as hell though.
depoli–solid as a rock–but low yielding. I have a fair number of shares and I hate when it trades because it moves up and down by a buck many times.
I am a strong supporter of 2% inflation.
The Congressional Budget Office (CBO) projects that interest payments will total $663 billion in fiscal year 2023 and rise rapidly throughout the next decade — climbing from $745 billion in 2024 to $1.4 trillion in 2033. In total, net interest payments will total nearly $10.6 trillion over the next decade. (sobering!)
Consider that lower inflation translates to lower interest rates….IMO there is an implicit 3rd Fed mandate (or at least I am rooting for) which is to keep inflation low and thus keep national interest payments from ballooning beyond our ability to pay.
When the FRB makes a directional commitment, the stick with it. During the past decade, they kept Federal Funds Rate low and complimented with QE. Powell says he wants a durable 2% inflation. That is a new directional commitment, which I hope is for the next decade.
I do wish to point out that the FRB has a dual mandate for both inflation and full employment. Going out of balance and ignoring one over the other, they do NOT have the mandate to do. If they do skew and cause a recession that means higher unemployment and less tax revenue. Less tax revenue means more borrowing. Okay, the interest paid will be lower but they will need to borrow more due to the absence of tax revenues. So 2% at the cost of a recession is to me, a zero-sum game. Changing things too quickly usually has negative results. We are clearly in a mess with the deficit.
UE is currently at 3.5%, historically low; UE touched on 3.5% in 2019 and before then in the 70s. It seems UE is already skewed to the low side; plenty of room to move back in balance. A rate of 4.5-5% would be consistent with historical norms.
When the BLS cooks the books regarding the labor data and then revises it 6-12 months later closer to actuals, it gives the Fed cover to focus only on inflation.
As you wrote Tim,
“When I look at rates – to my old brain, they aren’t historically high – maybe we should have them this high (or higher) for the next 10 years?”
This is why I get so pissed off about the Fed being insistent on a 2% inflation rate. This is not the historical norm. I am not saying that a 2% inflation rate is not a great goal. We can live with a 3%- 4% and get down to 2% over time. We don’t need to force it to 2% by some date.
Steve,
This may sound silly, because everyone in the fed/federal govt must be wicked smart to get such jobs/positions, but I have a feeling they really have no clue what they are doing. All one has to do is look at the transitory stage after covid. We created how much money out of thin air? Transitory as the govt kept spending more? Everyone and their cat knew it was a problem way before they acted.
I am not a real conspiracy nut so I often tend to lean towards gross incompetence. People who pretend to be serious but really are not working very hard in cushy govt/fed jobs. Just a dog and pony show.
We have a spending problem. The fed is doing OK right now but the federal govt is embarrassing. Not a political statement for either side. Just stating a fact here. Fix the spending/borrowing and almost everything else will fall into place with the current fed actions given some time. It cannot be done all at once like a drug addict quitting cold turkey but a 10 year plan would be a nice start to freeze spending and then optimize. A smaller fed govt.
I share your views.
In general, I agree with your assessment of the federal government. However, being a civil servant myself (NASA), I can tell you where I work there are no “cushy govt/fed jobs”. We are generally very high level professionals in the science and engineering world that typically make far less than we would in the private sector and accomplish far more. Myself as an example, being an MSEE, I could make upwards of 50% more in the private world – in fact, I did. NASA is my 2nd career, having spent 20+ years in the telecommunications business and now, 21 years with NASA till I retire in January. I decided to take the NASA job then because I liked the idea of doing advanced things for the benefit of the nation.
I liked the opportunity with NASA because it offered and entrepreneurial “feel” to an otherwise boring federal market. Plus, we get to do cool stuff like launching rockets and complex instruments to explore things in the earth science, heliophysics, astrophysics and planetary/lunar realms to further mankind and answer questions that have boggled our minds since the time we invented the wheel.
With that, I am often taken aback and ashamed that I am part of a federal government that is inefficient is it fiscal policies and vision for the future. It is very RARE that we actually have a real budget to work with as our illustrious leaders (both sides of the aisle garner equal blame) choose to kick the proverbial cans down the road and pass “stopgap” funding and “continuing resolutions” to address issues in a very ill-advised way. Had we been a real corporation, such measures would have bankrupted us years ago. What companies can really work well without a well-defined annual budget and vision for the future?
It’s part of the reason I am retiring – because of the way the feds do business today. Otherwise, I’d be hanging on at least another 10 years or until they kick me out! NASA gets thrown out with the bath water all the time, too, which is discouraging. Sometimes, I feel that the American people do not even deserve a world-class organization like NASA and have often hoped we would figure out a way to take the organization private. Meh, just my ranting thoughts on this.
“When I look at rates – to my old brain, they aren’t historically high – maybe we should have them this high (or higher) for the next 10 years?”
The last time the federal government ended a fiscal year with a surplus was on September 30, 2001, when there was a surplus of $128 billion. Trivia question for the day: What was the range of yields on the 10 year treasury from Sept 2000-Sept 2001?? A. 5.8% to 4.6%
I would encourage all to read Charles Goodhart’s “Great Demographic Reversal”. He observes that low inflation and low interest rates from 1990-2020 were driven by massive increase in available labor from (a) more women joining the workforce (b) rising numbers of working age individuals (c) globalization, largely including China coming online, but also adding southeast Asia and increased Eastern European efficiency after the fall of the Soviet Union. He argues that all these gains have ended, and that both inflation and interest rates will again rise as (a) the available working age population falls in US, Europe and China, and (b) to the extent there is deglobalization, that will reduce available labor pools, and be inflationary.
Click below to see a graph of 10 yields from 1962 to present. Rates are below average: https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart
What forces should keep rates below average historical levels??
We are still in a massive depression caused by technology, disruptive business practices, and government regulation changes.
You can see this by comparing gold vs dollar in the long term.
Temporarily we are receiving inflation as supply chains adjust and large materials exporters are offline due to war activities.
Long term deflation will come back as the previous trends will continue. New cheap labor markets get unlocked with China to India transition happens and then onto Africa.
IMHO – the “China to India” transition is unlikely to happen quickly or smoothly (if at all) as far as physical goods are concerned. If it happens, I think it is decades away. A transition into Africa is even farther away (lack of stability kills investment.
China set itself up to be an exporters dream. Fairly streamlined processes, well controlled corruption. There is corruption, but we call it “smart corruption” because they keep it out of the way of getting things made and exported. The bribe seekers usually put the “touch” on local suppliers so they don’t get in the way. I have started multiple export businesses in China and have had first shipments exported from China within a few weeks of startup. (FWIW – other SE Asian countries like Thailand, Malaysia, Philippines, Singapore can be equally fast, if you play within their rules).
India is an exporter’s nightmare. They have what we call “stupid corruption”. Some idiot will come demand a bribe (maybe not much – maybe only $25), but it puts the shipment (and whole supply chain) on hold until it is resolved. As soon as things progress another step, some other idiot will show up and demand a bribe (and tie things up again). This process goes on for months (or years). I helped lead a pilot project for a major electronics manufacturer trying to build in India for export, and we gave up after two years (never having gotten a commercial shipment out of the country). We tried again about 10 years later (abandoned about 3 years ago) and got the same result. We also tried to set up a repair facility in India and had to give up. Gov. rules were just insane – and they would change constantly.
That said, services that don’t involve the movement of physical goods are much easier in India (hence the multitude of call centers).
Private, thanks for this insight backed with real-world experience. The terms ‘smart corruption’ and ‘stupid corruption’ are welcome additions to my lexicon.
Some to consider Tim, I would put on a watch list. Again, I would look at x-dividend dates as you might pick up some both at a low point and the dividend for the end of Sept , First of Oct.
No politics here just an uninformed opinion. Expect some coming fireworks in Sept. from the halls of Congress which could spook the stock market and give an opportunity for the brave.
All of these have Preferred except one or two. Several may be take over targets, I threw in a couple ringers. Due your due diligence. Question debt, coverage of the dividend, are they expanding when they shouldn’t be going into a recession? Do they have advantages in their market etc
REXR, KIM, UMH, LXP, REG, SRC, BXP, PLYM, BFS, PECO, GMRE
I am sure others can add to this list. Or there maybe an ETF
Charles – some of those would definitely be on my watch list.
There was an issue of a baby bond by Gladstone Capital Corp (Z). Not sure how it rates against other recently issued baby bonds at a 7.75% coupon.
Robert – I bought the Saratoga new issue and the Capital southwest issue with current yields around 8%. Gladstone Investment came with a 8% coupon on 5/23 which also has a current yield around 8%–nothing wrong with that one.
https://innovativeincomeinvestor.com/security/gladstone-investment-corporation-8-notes-due-2028/