Economy:
The BLS released its CPI number for May this morning:
On a non-seasonally adjusted basis, CPI rose 1.8% over the 12 month period ending in May. Core CPI increased by 2% over the same period.
The BLS released its CPI number for May this morning:
Mnuchin: Trump will decide about China tariffs after meeting with Xi
Trump to CNBC: China will make a deal because 'they're going to have to'
Expectations low for Trump-Xi talks, preparations limited - Reuters
China exports grow in April despite U.S. tariffs, but import slump most in nearly three years - Reuters China's imports of U.S. products fell 26.8% Y-O-Y last month.
Trump doubles down on trade war tariff strategy after Mexico deal
Trump to CNBC: China will make a deal because 'they're going to have to'
Expectations low for Trump-Xi talks, preparations limited - Reuters
China exports grow in April despite U.S. tariffs, but import slump most in nearly three years - Reuters China's imports of U.S. products fell 26.8% Y-O-Y last month.
Trump doubles down on trade war tariff strategy after Mexico deal
The Fake News President claimed that Mexico agreed to buy large quantities of U.S. farm produce as a silent part of the agreement:
Mexico has no clue what Delusional Don is talking about. Mexico Never Agreed to Farm Deal With U.S., Contradicting Trump - Bloomberg
If Mexico's leaders had to guess what Donald meant, their best guess is that Donald was referring to the increased trade in farm products and manufactured goods on a trilateral basis among NAFTA signatory countries, which will likely happen when Canada, the U.S. and Mexico ratify NAFTA 1.1 and Donald refrains from imposing new tariffs on Mexico.
Maybe Donald can explain exactly how Mexico could compel its private companies to purchase more American farm products. Don't hold your breath waiting for an explanation.
Data reaffirms Japan's GDP growth in Q1 - MarketWatch For Japan, the 2.2% annualized GDP during the first quarter was excellent.
U.K. economy shrinks as Brexit hits car production - MarketWatch
Tweet from Harvard Professor Jason Furman:
Jason Furman (@jasonfurman) | Twitter
Mexico has no clue what Delusional Don is talking about. Mexico Never Agreed to Farm Deal With U.S., Contradicting Trump - Bloomberg
If Mexico's leaders had to guess what Donald meant, their best guess is that Donald was referring to the increased trade in farm products and manufactured goods on a trilateral basis among NAFTA signatory countries, which will likely happen when Canada, the U.S. and Mexico ratify NAFTA 1.1 and Donald refrains from imposing new tariffs on Mexico.
Maybe Donald can explain exactly how Mexico could compel its private companies to purchase more American farm products. Don't hold your breath waiting for an explanation.
Data reaffirms Japan's GDP growth in Q1 - MarketWatch For Japan, the 2.2% annualized GDP during the first quarter was excellent.
U.K. economy shrinks as Brexit hits car production - MarketWatch
Tweet from Harvard Professor Jason Furman:
Jason Furman (@jasonfurman) | Twitter
+++++
Markets and Market Commentary:
As noted by Bill Gross, there is currently about $11.7 trillion in bonds that have negative nominal rates. Jim Grant: Low Interest Rates Forever? Don’t Count on It - Barron's There is something fundamentally wrong with that statistic.
I agree with his observation that long term secular interest rate cycles usually last for decades, something that I have frequently discussed here.
You have to be up in years to have experienced the last long term bond bear cycle that started around 1946 and ended in 1981-1982.
The long term secular bull market in bonds started after the 30 year treasury peaked at over a 15% yield in 1981, which produced a once in a lifetime annual average real yield, based on subsequent inflation rates, of close to 11%.
Something will happen that will change the long term trajectory from down to up.
I am not confident about predicting the conditions and events that will cause a long term and persistent rise in interest rates, nor I am certain now that the current lowest ten year treasury yield, hit in 2016 at 1.375% (July), will be the lowest yield in the current cycle.
For several years, I thought the ten year treasury yield of 1.43%, hit in July 2012, would be the lowest yield which proved not to be the case.
I can only identify potential causes for a long term gradual increase in interest rates.
One cause would be increasing national protectionism that sources more products from local manufacturers that are priced significantly higher than what is available from foreign companies.
Another potential cause is that new bond supply swamps demand which I view as inevitable.
The tremendous increase in new bonds will likely IMO be coupled at some point with bond investors refusing to accept negative nominal yields and nominal rates that produce lower real rates of return than historical norms.
For the ten year treasury, that spread would be close to 2% over the anticipated annual average inflation rate, which is now predicted in the break-even inflation rate of the ten year TIPs which is currently at 1.73%. 10-Year Breakeven Inflation Rate-St. Louis Fed
A market related event would be mass selling of vintage bonds with negative nominal yields or abnormally low by historical standards real yields occurring at a time of massive supply increases.
Then there are the more traditional causes of inflation (e.g. demand outpaces supply, cost push price increases).
Worldwide population growth will overwhelm the planet's ability to provide resources, with that condition exacerbated by the impacts of global warming on the food supply. World Population Clock: 7.7 Billion People (2019); World population - Wikipedia
Bond guru who called interest rate top in 2018 now says yields could fall further - MarketWatch
I agree with his observation that long term secular interest rate cycles usually last for decades, something that I have frequently discussed here.
You have to be up in years to have experienced the last long term bond bear cycle that started around 1946 and ended in 1981-1982.
The long term secular bull market in bonds started after the 30 year treasury peaked at over a 15% yield in 1981, which produced a once in a lifetime annual average real yield, based on subsequent inflation rates, of close to 11%.
Something will happen that will change the long term trajectory from down to up.
I am not confident about predicting the conditions and events that will cause a long term and persistent rise in interest rates, nor I am certain now that the current lowest ten year treasury yield, hit in 2016 at 1.375% (July), will be the lowest yield in the current cycle.
For several years, I thought the ten year treasury yield of 1.43%, hit in July 2012, would be the lowest yield which proved not to be the case.
I can only identify potential causes for a long term gradual increase in interest rates.
One cause would be increasing national protectionism that sources more products from local manufacturers that are priced significantly higher than what is available from foreign companies.
Another potential cause is that new bond supply swamps demand which I view as inevitable.
The tremendous increase in new bonds will likely IMO be coupled at some point with bond investors refusing to accept negative nominal yields and nominal rates that produce lower real rates of return than historical norms.
For the ten year treasury, that spread would be close to 2% over the anticipated annual average inflation rate, which is now predicted in the break-even inflation rate of the ten year TIPs which is currently at 1.73%. 10-Year Breakeven Inflation Rate-St. Louis Fed
A market related event would be mass selling of vintage bonds with negative nominal yields or abnormally low by historical standards real yields occurring at a time of massive supply increases.
Then there are the more traditional causes of inflation (e.g. demand outpaces supply, cost push price increases).
Worldwide population growth will overwhelm the planet's ability to provide resources, with that condition exacerbated by the impacts of global warming on the food supply. World Population Clock: 7.7 Billion People (2019); World population - Wikipedia
Bond guru who called interest rate top in 2018 now says yields could fall further - MarketWatch
+++++
Trump:
Mexico Agreed to Take Border Actions Months Before Trump Announced Tariff Deal (NYT article republished at MSN). Donald did not care for this NYT article:
Trump's Twitter defense of Mexico agreement is short on specifics - POLITICO
The NYT responded by stating that it was confident of its reporting "and as with so many other occasions, our stories stand up over time and president's denials do not", adding that calling "the press the enemy is undemocratic and dangerous". NYTimes Communications on Twitter
If Mexico for "some unknown reason" fails to leave up to its promises, Donald will go back to imposing the "very profitable" tariffs:
Mexico also contradicted Donald's claim that there were side agreements: "Three Mexican officials said Saturday they were not aware of any side accord in the works, and that agricultural trade hadn’t been discussed during three days of negotiations in Washington." Bloomberg
No Secret Immigration Deal Exists With U.S., Mexico’s Foreign Minister Says - The New York Times Mexico's FM and U.S. sources believe that Trump may be referring to future negotiations involving a possible multi-country treaty that would require other countries to take in more Central American refugees. Mexico eyes Brazil for U.S. asylum deal as Trump revives tariff threat-Reuters That treaty would apparently require a vote in Mexico's Senate.
Mexican government contradicts Trump claim of yet-to-be-revealed concessions - MarketWatch
Nonetheless, Donald was adamant last Monday and Tuesday that there was already an undisclosed side agreement. If that "agreement" was not implemented, Donald would impose tariffs.
Yesterday, Donald waived a single sheet of paper at reporters that he pulled from his coat pocket, containing two signatures. He asserted that this piece of paper was the mysterious "very long and very good" secret agreement.
I thought that he was going to pull out a check from Mexico to pay for the wall.
The WP's photographer took a picture of the one page document which Donald held folded in his hand. The typewritten section did not fill the one page of this "very long" document. I am not going to call it an "agreement".
The documents is signed by Marik A String, the U.S. Deputy Assistant Secretary of State for Political-Military Affairs and Alejandro Celoria Alcantara who is a deputy legal advisor in Mexico's foreign ministry, hardly a person that could bind Mexico to anything.
The readable sections of the document are consistent with what Mexico has been saying about possibly negotiating a multi-country agreement.
When holding up the one page document, Delusional Don said alternately that (1) he could unilaterally impose whatever he believes are the terms contained therein on Mexico and that (2) Mexico's legislature had to approve of them first. The Duck will frequently contradict himself before finishing a sentence or paragraph which is what an Extremely Stable Genius does in Trumpworld. Trump Waves Paper He Says Is Secret Deal With Mexico, but Reveals No Details - The New York Times
Trump threatens more tariffs on Mexico over part of immigration deal - Reuters The tariff issue may resurface in a few months according to the Duck himself.
I will be looking at the data for border apprehensions to see whether any progress is being made:
Sourced: Southwest Border Migration FY 2019 | U.S. Customs and Border Protection
Southwest Border Migration FY2018 | U.S. Customs and Border Protection
Looking at the apprehensions in FY 2018 and earlier in FY 2019, I have to wonder whether the constant border wall talk has spurred the recent increase in migrants from Central America.
++
The Fake News President is openly hostile to any journalist that reports facts. Trump hits Comcast, MSNBC over 'hatred,' 'fake news'
Authoritarian Don has requested that the FCC pull NBC's broadcast license.
In TrumpWorld, accurate information is Fake News.
In TrumpWorld, any journalist reporting facts that contradict Donald's lies and reality creations is expressing hatred for the Extremely Stable Genius.
Note how Demagogue Don attacks the media without providing any specifics; and thereby avoids having to defend his claim that the reporting was false:
++
Mexico Agreed to Take Border Actions Months Before Trump Announced Tariff Deal (NYT article republished at MSN). Donald did not care for this NYT article:
Trump's Twitter defense of Mexico agreement is short on specifics - POLITICO
The NYT responded by stating that it was confident of its reporting "and as with so many other occasions, our stories stand up over time and president's denials do not", adding that calling "the press the enemy is undemocratic and dangerous". NYTimes Communications on Twitter
If Mexico for "some unknown reason" fails to leave up to its promises, Donald will go back to imposing the "very profitable" tariffs:
Mexico also contradicted Donald's claim that there were side agreements: "Three Mexican officials said Saturday they were not aware of any side accord in the works, and that agricultural trade hadn’t been discussed during three days of negotiations in Washington." Bloomberg
No Secret Immigration Deal Exists With U.S., Mexico’s Foreign Minister Says - The New York Times Mexico's FM and U.S. sources believe that Trump may be referring to future negotiations involving a possible multi-country treaty that would require other countries to take in more Central American refugees. Mexico eyes Brazil for U.S. asylum deal as Trump revives tariff threat-Reuters That treaty would apparently require a vote in Mexico's Senate.
Mexican government contradicts Trump claim of yet-to-be-revealed concessions - MarketWatch
Nonetheless, Donald was adamant last Monday and Tuesday that there was already an undisclosed side agreement. If that "agreement" was not implemented, Donald would impose tariffs.
I thought that he was going to pull out a check from Mexico to pay for the wall.
The WP's photographer took a picture of the one page document which Donald held folded in his hand. The typewritten section did not fill the one page of this "very long" document. I am not going to call it an "agreement".
The documents is signed by Marik A String, the U.S. Deputy Assistant Secretary of State for Political-Military Affairs and Alejandro Celoria Alcantara who is a deputy legal advisor in Mexico's foreign ministry, hardly a person that could bind Mexico to anything.
The readable sections of the document are consistent with what Mexico has been saying about possibly negotiating a multi-country agreement.
When holding up the one page document, Delusional Don said alternately that (1) he could unilaterally impose whatever he believes are the terms contained therein on Mexico and that (2) Mexico's legislature had to approve of them first. The Duck will frequently contradict himself before finishing a sentence or paragraph which is what an Extremely Stable Genius does in Trumpworld. Trump Waves Paper He Says Is Secret Deal With Mexico, but Reveals No Details - The New York Times
Trump threatens more tariffs on Mexico over part of immigration deal - Reuters The tariff issue may resurface in a few months according to the Duck himself.
I will be looking at the data for border apprehensions to see whether any progress is being made:
Sourced: Southwest Border Migration FY 2019 | U.S. Customs and Border Protection
Southwest Border Migration FY2018 | U.S. Customs and Border Protection
Looking at the apprehensions in FY 2018 and earlier in FY 2019, I have to wonder whether the constant border wall talk has spurred the recent increase in migrants from Central America.
++
The Fake News President is openly hostile to any journalist that reports facts. Trump hits Comcast, MSNBC over 'hatred,' 'fake news'
Authoritarian Don has requested that the FCC pull NBC's broadcast license.
In TrumpWorld, accurate information is Fake News.
In TrumpWorld, any journalist reporting facts that contradict Donald's lies and reality creations is expressing hatred for the Extremely Stable Genius.
Note how Demagogue Don attacks the media without providing any specifics; and thereby avoids having to defend his claim that the reporting was false:
Yes, the Bond Spur Bloviator, who would have been "honored" to serve in the Vietnam War, will turn the D.C. July 4th celebration into yet another MAGA rally to celebrate Our Great Leader:
Trump on Vietnam: Despite deferments, he’d have been ‘honored’ to serve - The Washington Post
I am so happy that Donald received another "beautiful" letter from North Korea's "Great and Dear Leader" who is not as Great and Dear a leader as the Duck himself who is the greatest, smartest, most stable and dearest leader in the history of the universe since the Big Bang. Trump touts 'beautiful letter' from Kim Jong Un - POLITICO
++
With a few exceptions, the republican position on climate change is not in doubt and can not be disputed by rational and informed persons. There is no man made climate change according to Trump's party, so nothing has to be done now to prevent an irreversible catastrophe. And there is no amount of scientific evidence that will convince them otherwise until the damage is irreversible and obviously catastrophic. White House blocked intelligence aide’s written testimony saying human-caused climate change could be ‘possibly catastrophic’
Trump Bungles Climate Change in UK - FactCheck.org
Thomas Friedman summarizes recent efforts by Trump's party to increase pollution and global warming in this article. Opinion | Connect the Dots to See Where Trump’s Taking Us - The New York Times Their consistent approach is to make matters worse rather than better.
Trump Bungles Climate Change in UK - FactCheck.org
Thomas Friedman summarizes recent efforts by Trump's party to increase pollution and global warming in this article. Opinion | Connect the Dots to See Where Trump’s Taking Us - The New York Times Their consistent approach is to make matters worse rather than better.
++++++++
1. Bought 50 THQ at $16.5-Used Commission Free Trade:
Quote: Tekla Healthcare Opportunities Fund (THQ)-a leveraged CEF
This last purchase was an average down from the prior one.
Closing Price Yesterday: THQ $17.12 -$0.09 -0.52%
Last Discussed: Added 100 THQ at $17.15-Used Commission Free Trade (5/11/19 Post)
Data Date of Trade (6/3/19):
Closing Net Asset Value Per Share: $18.39
Closing Market Price: $16.53
Discount: -10.11%
Sourced: THQ-CEF Connect
Holdings as of 12/31/18: SEC Form N-Q
SEC Filings
Dividend: Monthly at $.1125 (supported by ROC)
Given the ROC support, a dividend cut is a possibility.
Distributions | Tekla Capital Management LLC
Last Ex Dividend Date: 5/17/19
Dividend Reinvestment: Yes, at greater than a 5% discount to net asset value per share.
Last Elimination: Item # 6 Eliminated THQ at $17.65 (12/29/18 Post)
Other Recent Purchase Discussions: Item # 4.B. (1/23/19 Post)(snapshots of recent trading profits); Item # 3.C. Bought 10 THQ at $16.1 (3/29/18); Item 2.A. Bought 10 THQ at $16.96-Used Commission Free Trade (3/8/18 Post)
Chart: THQ Interactive Chart
2. Intermediate Term Bond Basket Strategy:
A. Sold 1 Vodafone 2.95% SU maturing on 2/19/23:
Profit Snapshot: +$20.7
Item #1.B. Bought 1 Vodafone SU at a TC of 98.275 (3/13/17 Post)
FINRA Page: Bond Detail
Sold at 100.498
YTM at 100.498 = 2.806%
Proceeds at 100.398 (after $1 IB commission)
1. Bought 50 THQ at $16.5-Used Commission Free Trade:
Quote: Tekla Healthcare Opportunities Fund (THQ)-a leveraged CEF
This last purchase was an average down from the prior one.
Closing Price Yesterday: THQ $17.12 -$0.09 -0.52%
Last Discussed: Added 100 THQ at $17.15-Used Commission Free Trade (5/11/19 Post)
Data Date of Trade (6/3/19):
Closing Net Asset Value Per Share: $18.39
Closing Market Price: $16.53
Discount: -10.11%
Sourced: THQ-CEF Connect
Holdings as of 12/31/18: SEC Form N-Q
SEC Filings
Dividend: Monthly at $.1125 (supported by ROC)
Given the ROC support, a dividend cut is a possibility.
Distributions | Tekla Capital Management LLC
Last Ex Dividend Date: 5/17/19
Dividend Reinvestment: Yes, at greater than a 5% discount to net asset value per share.
Last Elimination: Item # 6 Eliminated THQ at $17.65 (12/29/18 Post)
Other Recent Purchase Discussions: Item # 4.B. (1/23/19 Post)(snapshots of recent trading profits); Item # 3.C. Bought 10 THQ at $16.1 (3/29/18); Item 2.A. Bought 10 THQ at $16.96-Used Commission Free Trade (3/8/18 Post)
Chart: THQ Interactive Chart
2. Intermediate Term Bond Basket Strategy:
A. Sold 1 Vodafone 2.95% SU maturing on 2/19/23:
Profit Snapshot: +$20.7
Item #1.B. Bought 1 Vodafone SU at a TC of 98.275 (3/13/17 Post)
FINRA Page: Bond Detail
Sold at 100.498
YTM at 100.498 = 2.806%
Proceeds at 100.398 (after $1 IB commission)
3. Short Term Bond/CD Ladder Basket Strategy:
Short term CD rates are higher than treasury bills maturing at about the same time. I do not pay a state income tax on interest paid by either treasuries or bank CDs, so my only consideration as a practical matter is YTM.
A. Bought 2 Cathay Bank 2.45% CDs Maturing on 6/11/20 (1 Year CDs):
Issuer: Operating bank for Cathay General Bancorp (CATY)
CATY | Cathay General Bancorp Analyst Estimates
Cathay General Bancorp Announces First Quarter 2019 Results
CATY | Cathay General Bancorp Analyst Estimates
Cathay General Bancorp Announces First Quarter 2019 Results
B. Bought 2 Live Oak Banking 2.40% CDs (monthly interest payments) Maturing on 6/12/20 (1 Year CDs):
Issuer: Operating Bank for Live Oak Bancshares Inc. (LOB)
LOB | Live Oak Bancshares Inc. Analyst Estimates
Live Oak Bancshares, Inc. Reports First Quarter 2019 Results
Issuer: Operating Bank for Live Oak Bancshares Inc. (LOB)
LOB | Live Oak Bancshares Inc. Analyst Estimates
Live Oak Bancshares, Inc. Reports First Quarter 2019 Results
C. Bought 1 Pinnacle Bank 2.45% CD Maturing on 3/16/20-A Roth IRA Account (9 month CD):
This one was purchased with the proceeds from 1 McDonald's SU bond that matured on 5/29. I stay fully invested in short term bonds and CDs in this particular Roth IRA account and consequently did have sufficient funds to buy 2 CDs.
Issuer: Operating bank for Pinnacle Financial Partners Inc. (PNFP)
This one was purchased with the proceeds from 1 McDonald's SU bond that matured on 5/29. I stay fully invested in short term bonds and CDs in this particular Roth IRA account and consequently did have sufficient funds to buy 2 CDs.
Issuer: Operating bank for Pinnacle Financial Partners Inc. (PNFP)
PNFP | Pinnacle Financial Partners Inc. Analyst Estimates
PNFP Reports Diluted EPS of $1.22, ROAA of 1.52% and ROTCE of 17.60% for 1Q 2019
D. Bought 2 Morgan Stanley BK 2.45% CDs Maturing on 6/5/20 (1 Year CDs):
PNFP Reports Diluted EPS of $1.22, ROAA of 1.52% and ROTCE of 17.60% for 1Q 2019
D. Bought 2 Morgan Stanley BK 2.45% CDs Maturing on 6/5/20 (1 Year CDs):
E. Sold 2 Constellation Brands 2.7% SU Maturing on 5/9/22:
Short term maturities are defined in my asset allocation scheme as maturing within three years. This bond was part of the intermediate term allocation until 5/9/19.
Short term maturities are defined in my asset allocation scheme as maturing within three years. This bond was part of the intermediate term allocation until 5/9/19.
Profit Snapshot: +$27.12
Item # 3.B. Bought 2 STZ SU at a TC of 97.325 (4/16/18 Post)
Finra Page Bond Detail
Sold at 99.528
YTM at = 2.868%
4. Bought 15 PPLT at $75.99 ($1 IB Commission):
Quote: Aberdeen Standard Physical Platinum Shares ETF Overview
Closing Price Yesterday: PPLT $77.08 +$0.88 1.15%
Last Elimination: Item 3.C. Sold 17 PPLT at $83.75 (4/20/19 Post)
Highest Price Elimination: The highest sell price was at 104.5 on 7/6/16 with the shares bought at $93.1 on 6/17/16. The BREXIT vote, which occurred on 6/23/16, caused the brief spike. 2016 United Kingdom European Union membership referendum
Chart: Possible bottom in the $74-75 range
As with the silver ETF discussed in the last post, the reason for this purchase is primarily boredom. I will trade the precious metal ETFs for small profits.
PPLT Chart (major bear trend since August 2011 when the price closed over $181)
Item # 3.B. Bought 2 STZ SU at a TC of 97.325 (4/16/18 Post)
Finra Page Bond Detail
Sold at 99.528
YTM at = 2.868%
4. Bought 15 PPLT at $75.99 ($1 IB Commission):
Quote: Aberdeen Standard Physical Platinum Shares ETF Overview
Closing Price Yesterday: PPLT $77.08 +$0.88 1.15%
Last Elimination: Item 3.C. Sold 17 PPLT at $83.75 (4/20/19 Post)
Highest Price Elimination: The highest sell price was at 104.5 on 7/6/16 with the shares bought at $93.1 on 6/17/16. The BREXIT vote, which occurred on 6/23/16, caused the brief spike. 2016 United Kingdom European Union membership referendum
As with the silver ETF discussed in the last post, the reason for this purchase is primarily boredom. I will trade the precious metal ETFs for small profits.
PPLT Chart (major bear trend since August 2011 when the price closed over $181)
Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. A failure to perform due diligence only increases what I call "error creep". Stocks, Bonds & Politics: ERROR CREEP and the INVESTING PROCESS Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.
I have a treasury direct account. Among the uses for that account is the online purchase of inflation protected savings bonds directly from the treasury. The money is taken out of a bank checking account. I will also use it to invest surplus cash in short term treasury bill auctions since the checking account pays almost no interest.
ReplyDeleteI last discussed a purchase of the I-BOND in a 2016 post:
https://seekingalpha.com/instablog/434935-south-gent/4886289-buying-ibonds-treasury-direct
Back then, the fixed coupon rate was .1%. Every six months, the CPI inflation rate is added to the fixed rate.
I noticed the other day that the treasury has increased the fixed rate to .5% for I-Bonds purchased bond from May 1, 2019 through October 31, 2019:
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm
The fixed rate stays in effect for the life of the bond (30 years) or early redemption by the owner. The floating portion of the coupon will change with the CPI. The current six month period starting on 5/1 has a composite rate of 1.9%.
That will change when the floating component is reset on 11/1/19.
As previously discussed, the owner does not have to pay income taxes on the accrued interest amount that is added to the principal until the bond is cashed, matures or ownership is transferred to someone else. That renders I-Bond purchases more tax friendly outside of a retirement account compared to TIPs. The interest would also be free from state taxation like other U.S. treasury interest payments.
The current fixed rate is better than what I could receive buying $1K par value TIPs at auction or in the secondary market. For example, look at the price and current yield of the .125% TIP maturing on 7/15/2024.
While the market price was slightly below par value at 99.375 earlier today, the inflation accretion to the principal amount since issuance would increase a 1 bond purchase cost to $1,066.15 based on an inflation factor of 1.07284.
This does not make the I-Bond a good investment for most people, but only a better one than the 5 year TIP. I will only buy TIPs in a retirement account due to their tax issues.
Scroll to TIP "taxation":
https://www.raymondjames.com/wealth-management/advice-products-and-services/investment-solutions/fixed-income/taxable-bonds/tips-treasury-inflation-protected-securities
I will discuss the purchase of $5K in I-Bonds in my next post. When my 2016 I-Bond purchase-with its .1% fixed rate-is more than 5 years old, I will cash it. I could have the treasury redeem it now (1 year minimum hold), but would suffer the loss of 3 months interest which doesn't happen when held for at least 5 years. So I will hold that I-Bond for another 2 years. If I needed the funds from that vintage I-BOND to buy the new one, it might make sense to go ahead and cash it given the .4% higher fixed rate and simply forfeit 3 months interest. The holding period for the new one and the interest lost would define the cross over point, a calculation that I will not bother to make.
The probability of a .25% cut in the FF rate on or before the July 2019 meeting is now at 88.5%:
ReplyDeletehttps://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
That is already largely reflected in the 1 and 2 month treasury bill rates.
The highest yield starting with the 1 month treasury bill through the 10 year treasury note is now the 1 month bill at 2.24%:
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield
The 1 month bill was yielding mostly in the 2.42-2.45% range last April with the high rate this year at 2.51% (3/21/19).
I have noted a rapid decline over the past few weeks in short term CD rates, and the yields fall fast after 3 months currently.
Looking at the ones currently offered by Fidelity, the highest rate for a 3 month CD is 2.4%, but the only one with that yield is from the State Bank of India. Six month CDs have fallen to around 2.3% with 1 year CDs at 2.2%.
For CDs maturing after 3 months, you have to go out three years to June 2022 to pick up a 2.4% yield except for a 2 year CD offered by the State Bank of India at 2.55%.
I picked up some 3, 6 and 12 month CDs in the 2.4% to 2.45% range before they disappeared.
So this will be bad news (need for rate cut) is good punch bowl news... and up will go the market.
DeleteBased on Trump's comments, I am sure the Fed will decide to comply with him and lower it.
I don't understand why no one has a backbone. They must need new kind of chair in restaurants in D.C..
Prospect Capital Corp. (PSEC)
ReplyDelete$6.37 -$0.20 -3.04%
https://www.marketwatch.com/investing/stock/psec
I noticed today that the Masters of Disaster who manage this deservedly hated BDC had a portfolio company, United Sporting Goods, file for bankruptcy. PSEC of course is loaded up at $127.1M in this loser.
https://seekingalpha.com/news/3471162-prospect-capital-minus-2_6-percent-portfolio-company-files-chapter-11
BDC Buzz published a SA article about the upcoming write-downs PSEC write-downs which is not yet behind the pay wall:
https://seekingalpha.com/article/4269950-prospect-capital-upcoming-credit-issues-11-percent-yielding-replacement
I decided several years ago to avoid PSEC, even for lottery ticket purchases, since I view the management as hopelessly inept. I may reconsider when and if shareholders remove the external managers.
When a recession hits, we will find out more about the BDCs with poor underwriting standards. It will not be pretty.
Generally speaking, when a BDC loan goes on non-accrual, one of two bad things will likely happen that will produce similar results for the lenders.
The company will file for a bankruptcy or there will be a coerced restructuring of the debt outside of the bankruptcy court.
In both scenarios, it is likely that debt will be exchanged for equity, more debt will be added that has a more senior status in the capital structure, and/or some existing debt will be exchanged for new debt in a lower principal amount that may also extend the maturity and lower the coupon. Those are just general outlines.
It is possible that the firm will simply miss several payments, right itself in some miraculous way that never occurred to anyone before it had to skip payments on secured debt, and go back on accrual status without concessions from the existing lenders. I have trouble remembering an example but my mind is more than a little aged and sometimes a bit fuzzy.
The usual path after a missed interest payment on senior secured debt are the two bad ones.
I mentioned recently when discussing PennantPark Floating Rate Capital Ltd. (PFLT) that four portfolio companies went on non-accrual during the last quarter which was unusual for that BDC.
One of those companies, Hollander Sleep Products, filed for bankruptcy last month after going on non-accrual status in the first quarter. At the time of the BK, the company only had $523K in cash:
https://www.cfo.com/bankruptcy/2019/05/hollander-sleep-products-files-chapter-11/
This is a pre-packaged BK. The lenders will exchange $165M of the $233M of debt for equity and will lend another $118M to keep the company afloat during the BK. That loan is called a debtor-in-possession loan which has priority over every other loan.
https://www.investopedia.com/terms/d/debtorinpossessionfinancing.asp
I do not know whether the existing equity holders will be wiped out.
PFLT's first lien loan was in the original principal amount of $10.952+M and was valued at $9.418M as of 3/31/19.
Page 8:
https://www.sec.gov/Archives/edgar/data/1504619/000156459019017192/pflt-10q_20190331.htm
A frequent occurrence after a reorganization is that the lenders only manage to dig a deeper hole for themselves by throwing good money after bad in hopes of salvaging most of the original loan amount. I have no opinion on whether Hollander will prosper or not after emerging from its BK. It is a large pillow manufacturer.
Hello SG, I would like to get your take on this article; to me it smacks of the thinking from 2000. Not by the author, but by his explanation of the common wisdom of what market participants are doing.
ReplyDeletethanks
https://thereformedbroker.com/2019/06/13/when-everything-that-counts-cant-be-counted/
G: That is a good article worth reading. I would agree with the author.
DeleteSuccessful money managers over the past few years have followed this mantra, which I am quoting from the article:
“We buy the most expensive assets, and add to them as they rise in price and valuation.”
That certainly has a 1999 vibe to it. I would agree that no one really knows when the absurdities will end. We can only have opinions about what is happening, make an effort to understand why, and whether or when it will end.
And this is typical in today's market: "This is why a AirBnB is currently more highly valued than all of the publicly traded hotel chains on the NYSE."
I have published a new post:
ReplyDeletehttps://tennesseeindependent.blogspot.com/2019/06/observations-and-sample-of-recent_15.html