Market Pulse: An update on fixed income
On Oct. 5, within days of the S&P 500’s high, my column featured attractive fixed-income securities.
While the Fed will hike rates next week, expectations for next year’s rate hikes have plummeted from four to none or one. With stocks falling and the interest rate picture changing, how did those fixed-income selections do?
On the Oct. 5 article, “On tradeable fixed income,” I recommended Saul Centers 6.875 percent preferred ‘C’ (BFS.C). It was $25 then, it’s $24.50 now. Another selection, Annaly Capital Management 6.95 percent Fixed/Float ‘F’ (NLY.F), was $25.10 then, is $24.70 now, and recently paid a $0.43 dividend.
Finally, Prospect Capital 6.25 percent Note (PBB) and Medley LLC 7.25 percent Note (MDLQ) were recommended. They traded near $25 then, are within pennies of par now.
Those securities have held up well, even while stocks and corporate bonds fell. Of course, they all pay interest or dividends. After all, they are “income” vehicles.
When I wrote the early October article the consensus was that stocks would continue to do well and interest rates would continue to rise, putting pressure on fixed income vehicles. Nope. Stocks gave back all of their 2018 gains and the 10-year Treasury yield fell to 2.9 percent, which isn’t far from where it began the year.
Now almost everyone expects the economy to slow in 2019 and beyond so the 10-year Treasury yield won’t rise by much. In that environment, exchange-traded debt and preferreds should do well.
The ones I like yield around 6 percent with the exception of the adjustable preferreds. Those yield 5 percent and I don’t see much upside for quite a while. The Fed’s rate-rising cycle will soon end, so investors were right to be skeptical about the adjustables.
Predicting interest rates is a frustrating exercise, which is why the smart investment approach is to have some exposure to assets that would do well if rates rise and some to positions that would do well if they stay flat or fall.
So when so-called experts were sure that rates would continue rising through next year, as seemed logical, I still chose to keep preferred stocks, exchange-traded debt, and even the much-maligned utilities.
Their relative stability (utilities are up this year) showed that many investors didn’t believe the Fed would raise rates much. Investors had a better understanding than the pros.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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