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Tumbling Rates Not Providing ‘Lift’

Yesterday interest rates took a bit of a tumble, but overall preferreds and baby bonds didn’t move at all. Patience is required at this time to see increases in pricing.

As income investors we all want our holdings to move higher when rates move lower, but the truth is that price movement, in particular in the high quality, low coupon issues, takes time. We have had days where prices have moved sharply–one way or the other, but normally (on average) prices just move a nickel or dime per day.

Earlier this year as interest rates rose sharply we had large downward movements in prices/share and now we have had a nice 5-6% increase in prices in the last few months as interest rates have reversed to the current 3.40% level (on the 10 year treasury) from the 4.35% area. Now we may be at the point where interest rates move in the 3.30% to say 3.75% range. Movement within this range will produce limited movements in preferred stocks and baby bond prices—and that is fine with me. Locking in decent current yields and yields to maturity is going to pay huge rewards – over time — not by tomorrow, but next year and the year after.

So my point is to simply keep your nose to the grindstone – find a decent investment every week or two and then lock in that 6.5% yield on investment grade issues and hold it for years. Lock in that nice 7-8% yield on mid grade issues and hold them for years. The current yields and the yields to maturity (at 10-15% on many issues) can make you pretty wealthy.

7 thoughts on “Tumbling Rates Not Providing ‘Lift’”

  1. ZROZ outperforming big time. It makes no sense to buy preferreds if their duration doesn’t lift prices in such a big rally for long bonds. I am sure if the winds change preferreds will take a tumble like ZROZ/TLT. I’m sticking to to bills and t-notes right now. We will see next year.

  2. Hi Tim,
    I wanted to say thanks. I downloaded the investment grade spreadsheet last weekend. I live in the area that had a grid attack and lost power and internet for 4 days. I was so glad I had downloaded that spreadsheet, and I had time to study it in depth. Much appreciated.
    Back online today. YAY!
    As an aside, I urge everyone to have their passwords, etc stored on paper. Include all family members on this exercise, and update occasionally.

    1. Doug, Real warning regarding self-management caveats!
      I am lazy about using stops, but really don’t gamble too much anymore.
      The ZROZ mentioned here have zoomed 6.5% in just the last 3.5 days. Good time for a Mkt Stop, NOT a Limit Stop which can zoom right past ya.
      Helps in an blind outage too.

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