We were pretty fortunate to catch the preferred shares of DigitalBridge (DBRG) at a good price about a month ago, and I’ve continued to poke around in the world of high-yield bonds and preferred securities with hopes of finding other decent opportunities, especially those that trade under “par” and have the potential for capital gains to go with a high current yield. Late yesterday, I bought one.
The biggest driver of all high-yield and debt securities is the current level of interest rates, so I’m certainly not going “all in” on high yield… but some of these kinds of investments look a lot better now than they did six months or a year ago, when almost any kind of debt or fixed-rate security was a foolish investment. I think the world of “preferred securities trading below ‘par’ value” may continue to offer up some interesting opportunities for a while, as interest rate expectations reset.
We can’t know what the world of interest rates will bring us over the next year or two, of course — maybe rates in the US have peaked and will never rise meaningfully again, maybe inflation will remain more persistent, or get worse, and rates will have to rise to make up for that. My working assumption is that interest rates will be similar in a year to what they are now, in the 3.5-4% range for the 10-year Treasury — not because I’m a gifted forecaster of the debt markets, but because assuming that things will remain similar to how they are makes it possible to get my head out of the pointless exercise of trying to make guesses about how central banks and the global economy will shift and evolve over time.
Right now, with the core PCE price index coming in this morning with a 4.4% inflation reading for December (we’re always told that core PCE is “the Fed’s favorite inflation gauge”), the market is assuming that inflation is going to keep falling, and the Fed will be able to slow their “tightening” and maybe even stop raising rates soon (or, glory be, lower rates again), giving the world of highly-levered investors a break and unleashing animal spirits again to help the stock market and the real estate market recover. With that inflation gauge at 4.4% and the Fed Funds Rate at 4.25-4.5%, there is a logic to the assumption that ...