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This Grind Higher in Rates Is Painful

The grind higher in interest rates (or should I say sprint higher) is painful – not just in a monetary fashion, but on a persons mentality – I am certainly glad I have no intention of using my investments anytime soon. My accounts hit new lows today–I knew it was coming–just a question of when.

Today we had a mixed bag of economic data. New jobless claims came in lower than expected. Philly Fed manufacturing index came in soft at a -8.7 versus 5 expected. Existing home sales came at 4.71 million units versus 4.7 million expected–a couple percent below the last reading. While leading economic indicators came in soft at -.4% versus -.3% expected – last month was flat.

This mixed bag of news didn’t keep the 10 year treasury from jumping 10 basis points higher to 4.23%. The 1 year bill is at 4.63% which is 4.57% higher than a year ago. All I can say is WOW!!!

22 thoughts on “This Grind Higher in Rates Is Painful”

  1. SO even IG 6%+’s are down 15-20% in a month. I’m reviewing positions I brought into then as replacements and they are down steeply. At least March 2020 you could sense things would improve!

    So the big Q is what rates will do next year. At least many are shrugging their shoulders and saying we get a reset, then sideways action for a time….then a break. Up or down from there. Hard.

    Well some help that is heh? One thought is we get a recession next year, which leads to disinflation. I just can’t see how the fed could keep pushing rates. The carry on 30 trillion has almost doubled in a year. Is MMT still a thing??

  2. Speaking of rates grinding higher….A tidbit of info concerning junk entities one may be (or not) interested in. From Mark Grant on SA.
    High Yield borrowers that tapped the market in October have paid an average all-in yield of 12.25%, according to LCD data, which is the highest since March 2009.
    In addition to the handful of M&A deals currently in the works, a number of borrowers have costly pandemic-era debt to refinance and will be waiting for those windows of opportunity.
    Per the Morningstar US High Yield Index, there are 14 borrowers with just over $6 billion of bonds coming due in 2022 and 2023 where many, if not most of the issuers, will need refinancing.

  3. I have found that when I get the feeling to throw-up and throw in the towel, it is the time to buy.

  4. Today was the worst day for the canaries (IG, low coupon yield) issues since August 23rd. They were down -2.2%, all preferreds were down -1.2%. Babys/terms were down -.9%, so we will call it a pretty ugly day.

    This is officially the worst year for 10 year UST bond returns since 1928. They were down -18.1% YTD as of last Friday 10/14. The next worst year was 2009 with a loss of -11.1%. So it is not surprising that preferreds/babys/terms are having a Pepto-Bismol moment. Canaries are down -35.9% and the median preferred is down -19.6%.

    Being the resident III perma-bear this whole year, I don’t think the bottom is in yet, but everybody has to make their own decision on that.

    1. Tex, Though with similar end-goals, you and I are opposite ends of this see-saw.

      Worst day for canaries is for me is a welcome new tranche buying opportunity and pepto-bismol is replaced with a Napa-bismol. We’ll be staying this course until land is sighted. No icebergs here as we’re also staying in our high IG lane.

      I suspect there are indiscriminate ETF dumps as we repeatedly get hit by 1-2 hour “selling waves”. We’ll know when we’re done buying because those buyer swamping events will stop or slow. I think a key difference in approach may be related to you representing clients. I can see where that would be a challenge.

      These continuous buys are keeping our average-hold-price within arms length of current prices and will be long-term holds paying for many years to come.

      1. Alpha, I was thinking about buying more well below par quality issues to catch any upward swing down the road. Then I realized I have enough….The ones I have bought in the past couple weeks. Those are plenty below par now, ha, ha.
        Thank God, I had been buying heavier doses of Canadian resets as they are starting show signs o’ life rising nicely this week. One of them jumped 4% today. Trouble is I wont ever see it, until I sell as brokerage always has wrong low price on them. But that is fine, its keep me from being visually tempted to sell as I like the potential upside in the ones I have.

        1. Grid, Love those high quality CN holdings which consistently have a superior risk/return. Maybe a bonus ahead with a reversion to mean in the FX.

          and yes – more of those high IG issues are on the radar for next week. The hangover from the Fed’s 14-year party is providing plenty o’ opportunities. We waited years for this.

      2. Alpha, we might be on opposite ends of the seesaw but at least we can agree on one thing: Napa! I used to spend a lot of time there at wineries in a previous life. If a nuclear attack breaks out, I am heading to the Schramsberg cave to ride it out! Pretty amazing place if anyone gets a chance.

        My permabear view this year is borne out of my belief that the most probable path was higher inflation and higher interest rates. For a while, it was the right guess, then in the summer rally it was the wrong guess, and today it is the right guess again. My views on inflation come in large part because of the 1970’s-1980’s inflation the US had. I am guessing that most III’ers were NOT investors during that period. You would probably have to be 90+ years old today to have witnessed it first hand. If you are under 60, you were probably NOT an active investor during that period, hence do NOT have any inflation scars to show. You have lived in a secular 40+ year decline in interest rates which was very, very good to stocks/bonds/preferreds/60/40 etc. This year, not so much.

        One of the factors that makes me think the bottom is not in is that I do not see any signs of capitulation, in the markets I monitor. The fall in preferreds/baby bonds has been a “death by a thousand cuts” for the most part. Outside of a few specific issues that have gotten in trouble, they have mostly been on a glide path lower. This is why in general we have not been buyers of preferreds/babys/terms this year. Yes, we missed the tradeable summer rally, and have done a few swaps, but close to zero trades. Understand we still hold preferreds/babys/terms and they have suffered like most others, so I WISH the bottom was today or last week or last month. The goal is unemotional, probability based investing, so I have to remain the resident III permabear.

        1. Tex, I suffer from “itchy trigger finger”. For the better part of the year things went well being 100% in income preferreds being in issues like CBKPP, CNIGP, BKEPP, etc. I even got to over plus 6% on the year this summer. But despite being defensive with some dough, I have dropped to a bit under 3%. I could have done that in CDs, lol.
          But the thing I take comfort in is my total yield has shot up and overall portfolio quality stronger. So, I can hang my hat on that…While I see my yearly gains slip into negative territory by the end of the year, ha.

          1. Grid, to be up +3.0% YTD is INCREDIBLE when every other fixed income fund is down for the year. PFF has a total return YTD of -21.0%, so you are beating it just a little bit!

            Even CD’s would not have saved you this year. I know from experience. One of the accounts we manage is constrained to hold only FDIC insured CD’s and/or US Treasuries. We keep it close to 100% invested, so at the start of the year, it was chock full of stuff bought at lower rates. It currently has 351 positions and darn near every single holding has lost principal value YTD. Yeah, it could be worse, but try explaining to the account owner how the “you can’t lose money with this account” prints statements showing you losing money. Not a good situation.

            What I want is the Grid ETF. You will just have to buy a few of these things in a little larger quantity, which I am sure will be easy. You need to have ~ $50 million minimum to make an ETF viable. I think we could raise that pretty easily around here. I will write the first check and throw in a few Ted Drewe conretes as an added bonus. (Obscure St. Louis inside story.)

            1. Tex, I had two “advantages” on you. One being I broke all rules overloading bigly in just a few issues that I gambled on being eventually redeemed and they finally were. And the second was I am a pensioner and have a lot smaller stash, ha.

        2. Tex, Schramsberg cave – save me a seat!

          Thank you for your generous note. Not the 1970s, though launched from grad school in 1982 straight into a recession as Paul V. was securing his legacy. Wonder at times what our asset-values and wallets would look like without those decades of declining rates that followed. Tim’s appraisals would have looked a lot different. Normalized 7%+ mortgage rates will surely deflate housing 15%-20% over the next 12-18 months.

          Your caution is obviously very wise. Unless the fed holds the line, the misery of longer inflation or stagflation is near-guaranteed to crush portfolio and cash values. Still, inflation prospects and the news cycle have little if any impact on my own buy process which is market/math/rating-based and borne of too many idle hours on airplanes. Each buy-decision is rote based on the market’s filtering and interpretation of where we are. No random pick-ups, no news, indictors or predictions though valuation is important. Also use on the equity side and have an 19.3% YTD (and increasing) alpha to the S&P net of pfds – and net of the news cycle.

          My contention is that the news cycle and fear dissuade good investing decisions. If we look at a graph of any issue over a ten year period and search out the very best shoulda/coulda/woulda buy points – 100% of the them would be at the nadirs of the “V”s and “U”s. The news cycle during each, like now, was dire, fear was high and >50% were sitting it out – but the buys were the very best available over the period. This pattern repeats over and over.

          Thank you Tex for all your great posts. Time for a Napa-bismol.

        3. Uh Tex,
          Depends on how young you started. In 81 they still had SDGE or was it PGE preferred listed on the AMEX
          Local 451 brut is good enough for me.
          I agree, we haven’t seen bottom yet as there haven’t been any panicked retail investors calling saying sell my mutual funds I want to go to cash and not lose and more money.

  5. Season 1: Episode 5

    Jerry sells, George decides to go down with the ship.
    George gets the last laugh.

    IG issues way below par, 6-6.75% Qualified.

    I’m going down with the ship.

  6. The beatings will continue until moral improves.

    Personally I think a lot of the important data the fed looks at is the past. How else can one explain how they were so late to raise rates. Now the opposite will occur. Nov 4th employment data may be very interesting as seasonal adjustments up eventually have to go down. Things looked hot in the recent past but they work in both directions. Walmart/Macys already giving signals they are being cautious with hiring. Many others are probably thinking along the same lines. Hire less, give more hours. This holiday season might be lukewarm.

    1. fc–we may be seeing some results of quantitative tightening–$95 billion a month is less demand for treasury’s and mortgage backed securities is a lot of moola.

      1. I was under the impression that Powell said actual selling was not close in Sept and the reduction we see currently is just things maturing/expiring and lack of reinvestment of payments they received. Now that the 10 yr is paying 4% plus there might be actual buyers besides the fed who feel the return is finally “more normal”. They could continue letting maturities to take place and no reinvestment going on for a year or two easy. That would lead to a slow steady decline in holdings with less of a shock to the market. Yes.. eventually selling will happen but that could be 2024? Who knows for sure?!?

      2. Tim

        You may be right, but my understanding is that the $60 billion/mo of Treasuries and $35 billion of MBS is a cap, not a certainty or a goal.

        I have been unable to find out just how much $$ rolled off the Fed balance sheet in September, and October to date under QT.

        Does anybody know the numbers?

          1. Thank you very much for that chart PickleNick!

            So, as I read it, while $95 billion is the cap, the total roll-off for September was about $30.5 billion. Does that look correct?

            I’ll bet that relatively little of that was MBS if they are not selling any bonds; I read somewhere that someone estimated that by simply not investing proceeds MBS would take about five years to completely roll off the Fed’s balance sheet, as refinancing dramatically slows.

            1. donocash, Tomorrow i can dig up the pdf for you. I have to work at night tonight and tired from cleaning the small biz…

              Oh well.. i found it.


              page 4. This is Oct 19-20th.

              I was gonna say that treasuries represent their more short term maturity holdings while mbs/treasuries represent their long term. In 5 years a sizeable chunk would simply mature away. But in the end they are barely trying to get that big number down. Rates are their weapon of choice right now.

      3. Absolutely seeing results of QT – in addition investment funds around the world are forced to rebalance whether it be to purchase safer, US Treasury’s or due to redemptions, margin calls etc. It feels like it’s a race to the bottom. Hopefully its over at 10yr 4.5-5%

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