Market Commentary | March 20, 2024



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

Articles are provided for informational purposes only. They are not recommendations to buy or sell any security and are strictly the opinion of the writer. The information contained in these articles is impersonal and not tailored to the investment needs of any particular person. It does not constitute a recommendation that any particular security or strategy is suitable for a specific person.

Investing in publicly held securities is speculative and involves risk, including the possible loss of principal. The reader must determine whether any investment is suitable and accepts responsibility for their investment decisions.

Commentary may contain forward-looking statements that are by definition uncertain. Actual results may differ materially from our forecasts or estimations, and 2MCAC and its affiliates cannot be held liable for the use of and reliance upon the opinions, estimates, forecasts, and findings in this article.

Past performance does not guarantee future results. Investing in publicly held securities is speculative and involves risk, including the possible loss of principal. Historical returns should not be used as the primary basis for investment decisions. Although the statements of fact and data in this report have been obtained from sources believed to be reliable, 2MCAC does not guarantee their accuracy and assumes no liability or responsibility for any omissions/errors.

We routinely own and trade the same securities purchased or sold for advisory clients of 2MCAC. This circumstance is communicated to clients on an ongoing basis. As fiduciaries, we prioritize our clients’ interests above those of our corporate and personal accounts to avoid conflict and adverse selection in trading these commonly held interests.

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