Tuesday Morning Kickoff

Equity markets were strong last week with the S&P500 moving in a range of 2853 to 2940 closing the week 2926—up almost 3%. The 10 year treasury moved in a range of 1.44% to 1.54% before closing the week at 1.51%.

This morning stocks are showing a loss as new tariffs kicked in on Chinese goods over the long weekend and there is a fear that higher prices will now flow through to the consumer.

The average $25/share preferred stock/baby bond moved 8 cents lower last week. The average current yield is 6.38%. There are 138 issues trading at $25/share or below which is 9 less than last week.

The Fed Balance Sheet, which is now supposed to be a neutral mode, fell by $5 billion last week. When added to the previous weeks $24 billion runoff it totals a $29 billion runoff in 2 weeks (note that we incorrectly stated last weeks runoff at $12 billion). Seems like the Fed is taking advantage of very strong bond markets to let the runoff continue–we will see if this continues or if it is just a short term adjusting period.

We had no new issues announced last week. The JMP Group (NYSE:JPM) baby bond issue announced 2 weeks ago has not priced–we will continue to watch for a pricing.

Late this week (Friday) we will have the employment number for August announced and this is a critical number as we look at the Fed meeting mid month—to cut or not to cut.

6 thoughts on “Tuesday Morning Kickoff”

  1. TIM, you referenced JMP Group:
    I got this message from their IR head today…
    JMP Group filed an S-1 registration statement with regard to senior notes on August 21. That filing gives the company the ability to offer the notes at any time in the future but does not indicate that we are currently making an offering. There are no new baby bonds at this time.


    Andrew P. Palmer
    Investor Relations | Corporate Communications

    T 415.835.8978
    E apalmer@jmpg.com

    JMP Group LLC
    600 Montgomery Street, Suite 1100
    San Francisco, CA 94111


  2. If yields continue to decline then the place to be is in longer duration securities as you will get the biggest bang for the buck. Not necessarily the longest, just longer. Many investors got trapped in late 2018 thinking that rates were going to go higher and were in floating rate or short duration which has not performed as well in 2019. Just moving to an intermediate fixed income theme from a short duration strategy can still work out well if rates move lower and stay there.

    Preferred securities is probably the only easy place where you can get really long duration junk. Most traditional junk funds have a duration of 5 or less. Individual securities that are junk can have long maturity dates but that brings in concentration risk to the equation.

    1. I have a contrary opinion. Now is the time to buy floating rate because the prices are better than fixed rate. By a wider margin than is prudent.

      1. All depends on the risk premia. Take a look at Canadian floaters. The risk premiums are eye popping.

        “Risk” isn’t a dirty word; “uncompensated risk” is.

        Gimme 150-300 bps over fixed and I’m interested.

  3. Price moves inverse to yield. For this reason I didn’t have cash this year and one day I had only $1.89. I was taking profits on December junk buys and selling call risks to buy IG IPO stuff until July. I finally got a little cash but then bought some 30 yr TIPs at a auction about a week ago now up 6.06%. Those things are too abstract to understand so feels really weird to own them. But the basket of IG bought this year feels normal to own and actually went up last week to 9.8% excluding divvies so that is pretty nice so far. Now I have a little bit of “cash” it’s around 3.5% but lots of bonds due this fall so more cash coming in would take “cash” up to about 12% if I don’t spend it. Tim’s list shows lots of negative YTW not accounting for inflation. Maybe rates go down more and yields go down more and prices go up more but I don’t know that. The bond traders in Europe are making record breaking profits 35% with this very simple math so far this year and the further negative rates go the more money they make. But rates can go down and prices go down too. Rates and yields are not synonymous and yield to risk is provisional and related to quality. Price moves inverse to yield is math absolute. For these reasons I own mostly IG right now and am not a seller. Friday I bought some semi junk TCFCP $25.50 lots of volume but I don’t know if it is a good investment or not.

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