This is a guest post by Landlord Investor originally posted to Yield Hunting Alternative Income members on February 23rd. All prices are from that date.
With rates moving higher and inflation accelerating we want to continue focusing on high-yielding cyclical preferreds and bonds with limited duration. On the avoid list are recent vintage IG issues (with the possible exception of OPP-A).
Rates are rising because inflation is accelerating as evidenced by rising industrial metal and energy prices. This is being driven by booming demand for physical goods (at the expense of services) which was largely triggered by pandemic related lifestyle changes. The demand for goods is also driven by more long-lasting demographic trends such as millennial nesting.
Inflation is also being driven by robust fiscal (and monetary) stimulus. Consumer discretionary spending is benefiting from fiscal stimulus as noted in headlines such as:
Retail sales burst higher in January as consumers use stimulus checks to spend heavily
The next stimulus bill should keep the ball rolling on consumer spending. After that, a multi-trillion dollar infrastructure bill is on deck which should further boost the industrial sector.
Another factor on the horizon that will accelerate inflation is the coming pivot in spending patterns that a post-vaccine return to business (and leisure) will bring. Rising energy demand will be one impact of this return. The summer travel season should be busy this year as Vehicle Miles Traveled (VMT) and jet fuel consumption skyrocket on a year-over-year basis.
The following preferreds align with these trends through their focus on the industrial, consumer discretionary and energy industries. They also tilt strongly toward credit risk and away from rate risk to align with the rising rate environment.
Buying tip: While the below preferreds are near or at borderline buy levels, they could end up as babies thrown out
