Staring at a Rate Increase

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So here we are just 46 hours before the Fed likely announces a fed funds rate hike of 1/4%.  We will be plenty happy when they get this out of the way so we can move ahead.  It would be a shock if the Fed did not raise rates as everyone is fully expecting a raise and to miss this opportunity would be foolish.

Investors need to remember that generally the marketplace will determine the level of interest rates–the 10 year treasury has moved higher based upon investor action–not Fed action.  After the probable hike on Wednesday the 10 year treasury may move up in yield or it may move down.  Certainly the knee jerk market reaction Wednesday afternoon and Thursday will be somewhat driven by Fed action and more importantly the verbiage that is used by Yellen at the press conference that will take place after after the FOMC announcement.

So what do we believe investors should do now?  It is really simple at this point in time as there is really little you can do.  You have lived through an increase in the 10 year treasury from 1.70% to almost 2.50% since early October and while the average preferred continues to move slightly lower (by slight I mean a penny or nickel here or there) the largest amount of pain has been endured. At this point in time we don’t think that the announcement on Wednesday will cause any further significant pain unless they do something totally unexpected like hike 1/2% instead of a 1/4% and there is virtually no chance of that happening. It is more important to see what comes out in the statement and press conference.  We would expect kind of the same message–increases will be measured and will be data dependent.


So as we move ahead remember that if you believe rates are going to march higher throughout the year (for instance if you believe that there will be 2 or 3  1/4% rate increases) you should be positioned in some of the shorter duration “baby bonds” or term preferreds if you are sensitive to capital loss.  Our list of these types of investments is here.  Generally these issues will have less volatility than perpetual preferreds and will react less violently to the downside if rates moves higher.  We personally invest only in shorter duration issues at this time as we don’t tolerate capital losses well.  Alternatively fixed-to-floating rate issues will also trade firmer than perpetual preferreds. Our list of fixed-to-floating rate preferreds can be found here.

At the risk of over promoting short/medium durations we have our 2014/2015/2016 Short/Medium Duration Portfolio which has garnered a 6-7% return with essentially no trading and little worry (at least so far). You can look at this portfolio here.

To get more information on preferred stocks, screen them, set up your own portfolio and receive email alerts, go to now.







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