Mark J. Grant, Author of "Out of the Box and onto Wall Street"
Time to Revisit An Old Friend
“Time's fun when you're having flies.”
-Kermit the Frog
I have suggested for weeks, I suggested in my piece yesterday, that you take some money off the table, sell some of your bullets, and re-deploy. Quantitative Easing is coming to an end and there will be ramifications for the bond markets and, eventually, for the equity markets. The days of free money, newly printed money, are coming to a close as America begins to right itself and as our banking system is mostly out of the woods. The longer end of the curve, hit hard yesterday, is heading to higher yields in my opinion. We will also begin to see inflation creep in for a variety of reasons and I point specifically to the price of gas at the pump which, while no one was looking, has hit its all-time highs this week as each penny of increase adds $1 billion to household spending and gasoline has risen thirty cents in the last month.
“Alot of people spend time talking to the animals but not that many people listen. That's the real problem.”
-Winnie the Pooh
TIPS
Maturity Yield
4/15/15 -1.54%
1/15/17 -1.16%
7/15/19 -0.63%
1/15/22 -0.11%
Inflation: The Robber of Barons (or Barrons) and the Rest of Us
It is highly likely, besides backing up the long end of the yield curve, that we are just approaching a bout with Inflation. I have presented, above, the yield of TIPS securities which are the government guaranteed alternative to dealing with Inflation and they have negative yields a fair ways out in maturities. This has been discussed before, some years back, as one of the positive attributes of CIPS (Corporate Inflation Protected Securities) which have a floor of Zero. Let me first be clear that I am touting no specific offering or security but making a positive comment now on the general class of CIPS ownership. As one example there was a recent deal presented that had a seven year maturity, the coupon, given the three month look back structure, is known at 4.69% which is +299/7 year and the float over CPI was +200 which is +263 to the corresponding TIPS. CIPS, in general, pay and float monthly and there are usually no calls or caps or any types of funny construction. They are also generally senior debt, in-line with other senior debt, so that the credit component is no different in CIPS than in the issuer’s bullet maturities. Given the realities of today’s markets I would also point out that a LIBOR floater at +200 would only yield a 2.47% so that this particular CIPS bond yields +222 to a corresponding LIBOR floater. Given all of these comparisons it now seems to me that this class of securities, CIPS, should now be re-examined with the thought to accumulate some of the offerings in this class either in the primary or secondary market. As yields rise and as your bullet maturities erode in price and as profits are lost, here is a decent option for capturing profits that you may have and re-deploying in CPI floaters that should not only retain their value but provide income that is superior to many bullet securities.
“Inflation is taxation without representation.”
-Milton Friedman