Well with the little panic we had in bonds on Wednesday it is kind of nice to have the bond markets closed today. A 12 basis point increase is very close to where we could cause a stampede of folks out the low coupon preferreds and baby bonds.
We have had losses of about 1% (25 cents) on the average $25/share baby bond and preferred issue this week (of course some much more and some none at all). As you might expect the high quality, low coupon issues, fell by around 1.3% thus far on the week.
Now if you are an “immediate income investor” (you concentrate on the income stream versus total return) you might not care 1 wit whether prices are falling–you might even be saying that ‘more bargains for me’. On the other hand if you look at your total return and a few percentages here and a few there and pretty soon your capital has evaporated in sizable ways. There is no right or wrong way to look at these things–just the way that is best for you.
I started my move back into the short maturity issues this week–term preferreds and baby bonds–the list which you can see here. I am selling low coupons in particular those that are perpetual–I remain holding those that are low coupons with maturity dates in the next 5 years.
We all know from history that short dated maturities will move only modest amounts if interest rates continue to move higher since they have a date certain for repayment of your $25/share liquidation value at maturity.
Folks in low coupons will rotate out to some degree into higher coupon issues–say 6% and above.
Over time if rates continue to move higher all perpetuals are at risk of capital loss (which may or may not matter to some as noted above). The losses can be quite dramatic.
We all tend to forget where rates can go–we have been in a falling rate environment for so long – 40 years! No one can predict where rates are going, but it is always good to remember where they have been–because they can go there again.
Here is my favorite chart of a perpetual that I love–the Tricontinental $2.50 Cumulative $50 Preferred which has been outstanding since 1963. This is an extremely high quality issue with asset coverage ratio of about 1,400%–it is redeemable anytime at $55/share.
Back in the early 1980’s it traded as low as $18/share. Now it is at $58. Never in my wildest dreams could I think of these shares revisiting $18–but it is a good illustration of the possible movement of share prices–let’s hope we never see this again (you all remember 13-18% mortgages).