Market Commentary | March 20, 2024
Rotation
A Bloomberg report out earlier this week describing that interest rates have recently risen to their highest level this year reminds us of two things. First, no one has been consistently successful in forecasting the pace and direction of interest rates (including us). Second, markets are ultimately efficient in price discovery. In the second item, “ultimately” is the key consideration.
Two years ago, when the Fed started their inflation fighting campaign of interest rate hikes, we took substantial positions in discounted preferred shares, particularly those with near dated conversion to floating rates. We felt that the market had oversold these issues, and they suited our objective to mitigate some of the damage that rising rates have on business operations and real estate in particular. In the interim we have enjoyed outsized dividend yields and relative price stability.
This year’s yield gyrations, however, have led us to believe that prices may have now dislocated in the opposite direction restoring preferred shares closer to fair value. Preferred shares pricing is at least partially tied to Treasury yields and the graph below indicates that linkage has decoupled.
As rates rose, Treasury and REIT share prices declined and preferred shares hovered and even rose.
Today’s Federal Reserve commentary implying that we will see rate reductions before year’s end has provided much needed solace to real estate shares. We have steadily been selling our preferred positions and buying common REIT shares which we feel are dramatically oversold.
A soft landing ahead could provide outsized returns.
Notes and Disclosure
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