Markets Continue to Thumb Their Noses at the Fed

It has been somewhat of a amazing ride in the interest rate markets since the Fed raised interest rates 2 weeks ago. While we figured that rates interest rates might fall a few basis points after the Fed Funds rate increase we didn’t think they would fall 20 basis points!!

We have watched the average preferred stock share gain about 30-40 cents in the last 2 weeks.  As we look back over the last 6 months we have seen the average preferred share go from $26.25 all the way down to near $25 and today the average share price closed at $25.82.  That was quite a ride and one that presented numerous opportunities for those nimble folks that trade preferred shares as they were able to initially unload and lock in gains and then repurchase various sectors as the shares began to move higher.  Of course while we wish we had the time to trade in and out we don’t have—so while we continue to perform “ok” we were unable to do much trading.

So why have rates fallen and what is likely to happen through the rest of the year?  1st of all the condition of the global economy remains somewhat tepid and interest rates throughout Asia and Europe are so low that investors simply pile into the U.S. 10 year treasury every time rates move higher–it is a simple supply and demand situation. In Europe only 10 year rates in Portugal at 3.9% and Greece at 6.75% provide higher rates–and who the heck wants to hold bonds from a couple bankrupt countries (although some would say the U.S. is bankrupt the markets seem to say otherwise).  With Greece continuing to need bailout after bailout (although no one seems to care anymore) it is unlikely we will see much higher rates in Europe anytime soon.  We watch the European economy here.  Of course this isn’t a detailed look at Europe, but it is all we need (and want) as we have time only for quick overviews.

2ndly I believe that our new President is driving investors into the safety of bonds, helping to keep long rates down. After a huge run up in equities since the election the reality of very little getting done in Washington DC on Trumps agenda is beginning to sink in–although there is still NOT full acceptance of how difficult it will be to get significant legislation  completed.  This is why we are seeing the struggle in the equities markets over the course of the last 2 weeks–1 day investors feel confident in the administration and the next day they are scared as hell.  We suspect that this condition will continue for a while and this will keep income issues locked into favorable pricing.  In many ways the last couple of weeks, since the Fed Funds rate hike, has been a Goldilocks situation and if this continued for the rest of the year we would be very happy.

It would seem that the 10 year treasury at a yield of 2.35% is about as low as we are likely to see for the next month or two.  Economic indicators like consumer confidence have shown extraordinary strength–announced Tuesday at a reading of 125.6 which is the highest reading since 2000 would seem to indicate there will be enough economic strength to put a floor under interest rates.  On the other hand there is no current reason to believe rates are heading higher anytime soon–from this we have Goldilocks–meaning there is no reason to lay awake nights worrying about higher rates.  Of course higher rates are data dependent, but given the supply/demand dynamics in the bond market we would feel free to do a little “trading” and “scalping”, some dividend capture is in order.  We would love to do some of this but we don’t have time to mess around now as we so we are more “buy and hold”–but income investors should feel free to try to scalp some shares at 50 cent/share profits.