Some favorite ideas for ‘locked-in’ returns of ~6.5%

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(This is our daily morning note for Friday, November 4. A letter like this is sent 4 days a week)


The non-farm payroll report sparked markets with the Dow rising more than 600 points. Since then he has given up all those earnings. It seems that the markets changed their conclusion about what the Fed’s jobs report will bring next month.

Friday’s October nonfarm payrolls report left investors divided, fueling some concerns that the Fed will persist with its hike campaign as the labor market added 261,000 jobs. Others interpreted the findings as a sign that the labor market is starting to cool down, albeit at a slow pace, as the unemployment rate rose to 3.7%.

In other news, rates are rising on the short end while the long end is fairly flat but close to its 52-week high again. Commodities are stronger with the dollar weaker. Terminal rate expectations are now at 5.13% as the stronger jobs report means the Fed will have to do more to inflict more pain to see the labor market crash.

Equity markets ended lower again yesterday, following Wednesday’s sell-off in the wake of disappointing Fed comments. The Fed raised rates by the expected 75bps, but signaled rates could stay higher for more time to fight inflation. Growth-style stocks underperformed, which has become a trend this year as policy rates rise. Treasury yields were also on the move, with the 2-year hitting a level not seen since 2007 and the 10-year trading around 4.2%.

The Fed turned around well, but not in the direction investors expected. At this point, it is pretty obvious that the Fed will go ABOVE the 5.13% markets implied terminal rate. Therefore, we will reiterate that this is not the time to go out on a limb and risk too much or add more to your risk assets. In any case, it would be reducing the risk.

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Today’s surge in 2Y Treasury yields is due to yesterday’s Fed Chairman’s press conference where Powell explicitly said that the FOMC is revising upwards its view on where Fed funds will eventually hit their Maximum point.. However, he did not offer an opinion on maximum rates, so markets are left to their own devices at least until policymakers weigh in on this issue. Past history is a guide, and says that 5.0 – 5.5% is a reasonable level to watch. All that seems certain is that until 2-year yields stabilize, stocks will remain under pressure…

Even owning short-lived bond funds as a substitute for cash means losses. MINT, for example, is down more than 2%. While that doesn’t seem like much compared to the ~40% loss on the Nasdaq, it’s not what you want to see for your “cash.”



The question is, where are you “hiding”? If you lose money on cash substitutes like MINT, NEAR, GSY, JSPT and others as the 2yrs ramp up towards that probable 5.5% terminal rate, why invest in them here?

Money has been draining out of ultra-short duration funds for this reason, taking liquidity with it. In fact, almost $2.5 billion came out of the $21 billion iShares Short Treasury Bond ETF (SHV) on Tuesday alone. This is the largest one-day exodus since the fund was launched in 2007.



This could be the result of the latest rally in equities as investors move money out of “cash” and into riskier, longer-duration assets that has pushed the S&P up 8% in recent weeks.

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The other idea is that investors are buying long-duration debt like 10-year Treasuries. The idea is that the Fed is going to rise higher than originally believed and that a recession is more likely than ever.

Investors have a choice. Lock in these juicy returns today for several years, and if rates go up, be content with unrealized losses at market price knowing you’ll eventually return to par. Or you can go short, very short, on something like SHV above or an iBond ETF target that is 2024 or sooner.

We will talk about this in more depth in the coming weeks. For now, we continue to defend a risk-averse strategy. Mike Wilson just said that he sees an S&P 2950 in the next few months. That’s another 20% downside from here.

Below is a new edition hitting the market that looks interesting.

Wells Fargo & Co. (WFC) 5-year incremental note

Coupon Increment Schedule:

6.00% From 11/09/2022 to 11/13/2025

6.25% From 11/14/2025 to 11/13/2026

8.05% From 11/14/2026 – 11/14/2027

Expiration: 11/14/2027 – Expiration Year

Call information: 5/24 @ 100 – No calls 6 months

YTW: 6.00%

Price: $100.00

Rating: A1/BBB+

CUSIP: 95001DCM0

Trade date: 11/09/2022

Or you could venture into some of these high-quality favorites that are way below average right now. The chance of them calling you is essentially zero at this point. But regardless, it could see a sharp appreciation if rates decline.

For example, you should query:

  • RiverNorth/DoubleLine Strategic Opp (OPP-B), yield 6.74%
  • RiverNorth Opp (RIV-A), yield 6.82%
  • Schwab Series D (SCHW-D), yield 6.43%
  • JP Morgan K-series (JPM-K), yield 6.35%
  • Wells Fargo Z-series (WFC-Z), yield 6.70%
  • Capital One series J (COP-J), yield 7.05%
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These issues could be a good replacement for those who don’t want to have individual bond issues (like the one I posted below). The big difference is that these don’t have an expiration date that gives them that pull-to-pair (price converges with the pair as it gets closer to expiration), which is a huge advantage in this market.

Or investors can match their current bond holdings by adding some of these positions to their portfolio to diversify and lock in some returns without the possibility of a short-term call.

Finally, take a look at JCE, a fund we called out a few days ago for being ridiculously overpriced.



Have a good week!

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