Well we got through last week in good fashion although we did see longer term interest rates move higher for the week.
The S&P500 moved higher on the week, the gains were just a bit less than 1.4%. Most of the gains came on Thursday in a somewhat delayed positive reaction to the 50 basis point Fed funds reduction. While the index closed at a record high on Thursday it gave a bit back on Friday. The futures markets are pointing higher this morning although fairly modestly–we all know this means zip at this point.
The 10 year treasury yield rose last week to close at 3.73% which was 8 basis points higher than the close the previous Friday and near the high for the week (which was 3.74%). Of course the shorter maturity Treasuries fell in yield as one would expect–and will likely continue to drive lower. CDs and money market rates moved a bit lower–it should be expected that the yields on these 2 vehicles will now drift somewhat lower over the course of the next 30 days and reach rates in the mid 4.60%-4.70% area.
This week we have an important piece of data being released on Friday when the personal consumption expenditures report (PCE) will be released. This will start to feed into the data for the next FOMC meeting which happens November 6-7.
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The Fed balance sheet assets fell by $6 billion last week to stand at $7.109 trillion. In 2 months we should see this below $7 trillion.
Last week we saw the average $25/share preferred and baby bond continue their move higher as the average rose 24 cents. In the last 2 months prices have moved almost 4% higher-a stellar move higher. Investment grade issues moved 27 cents higher, banks were 31 cents higher, mREIT issues were 20 cents higher with CEF issues up by 13 cents. Shippers were 12 cents higher.
When do you guys take profit? I have some AGNC preferreds I grabbed back when they were around $18, and now they are all right around par, some above par, and the floating rates are kicking in.
Should I just let these ride and enjoy the floating divs or harvest some profits? I’m looking at 25+% capital gains on these, but the 10% floating divs (much higher YoC) are pretty attractive, and I kinda expect these to be called over the next year as rates drift lower.
It’s always the $64 question. There are so many variables to take into consideration: Are the preferreds in a taxable or tax-deferred account? Are they short-term or long-term gains? What is your tax bracket? What will you do with the proceeds? Don’t think of it as all-or-none. Sometimes the answer is to sell 25% or 50% of the position.
With that said, the Fed appears to be very concerned either about the economy or is playing politics. Either way, they seem to be leaning towards aggressive easing which would continue to support income-producing assets. The biggest concern to me is the enormous and expanding federal debt, but that’s just me. Good luck.
Would you define shippers please Tim.
I think this pc of information is a telling example of the disconnect between investors in the market and the reality of what is going on in the real world. When investors finally look at the numbers there will be selling in this segment of the market.