Destra Insights

The market and a lot of pundits are suggesting that the Fed may pull back to a more traditional 25 bps increase at their first meeting here in a few weeks. But even if they do pull back to a 25 basis point increase, it is still an increase. And arent rising rates supposed to be bad for bonds? Well, looking back at 2022 that certainly seemed to be the case.

2022 is in the history books and good riddance! Most of us will be happy, both personally and financially to put last year far in the rearview mirror. Record-breaking, inflation, soaring interest rates, an old-style dictator rolling tanks across Europe, and funny money crypto platforms going up in smoke; all were factors in the terrible performance of both stocks and bonds in 2022. Listen today for some more interesting insights on 2022 and a roadmap for 2023.

The cliff divers at La Quebrada Cliffs in Acapulco, dive 134 feet into a narrow rocky inlet where the waves swell to a depth of only 14 feet for roughly 5 seconds. They dive when they see rocks knowing that the water will wash in during the time it takes them to descend.

For years now, investors have been struggling with historically low interest rates and the search for yield has pushed more and more people to invest in lower quality bonds and loans – junk or high yield as it is sometimes called. But did you know that high yield bonds are not the only asset class with high yields.

Qualified dividend income is a part of the tax rule that allows certain dividends from US corporations and qualified foreign corporations to be taxed at rates lower than ordinary income rates. This may equate to substantial tax savings for investors, especially those in higher tax brackets. While QDI is often associated with common equity dividends many preferred securities issue dividends which qualify for this tax treatment as well. Historically, preferred securities have scored well on both fronts, credit quality and coupons. But certain preferred securities may have yet another potential source of value, called Qualified Dividend Income treatment or QDI.

Often, decisions about which income investments to buy come down to balancing the amount of credit risk that we might we willing to accept as an investor, against the expected yield or stream of coupons off an investment. Historically, preferred securities have scored well on both fronts, credit quality and coupons. But certain preferred securities may have yet another potential source of value, called Qualified Dividend Income treatment or “QDI”.

It’s all about the intangibles…. Innovation improves lives and typically, the capital markets reward those companies that drive innovation. As our society and economy evolve, we have changed the perception of what we appreciate, ….what we value.

Even though interest rates have risen significantly off their all-time lows in 2020, they remain historically low and investors continue to search for yield wherever they can. As a result, preferred market sectors with higher yield have tended to outperform over the past year.

Here in mid-December 2021, we anxiously await the Fed’s announcement on the direction of interest rates and whether they will speed up their efforts to end the bond buying that the Fed has been conducting since early 2020. All of this, in response to inflation that is proving to be much more than transitory. This is spurring a lot of talk about where the stock market goes from here. But there is seemingly much more agreement on where the bond market goes, in the face of rising rates ------ down!

Log jams and bottlenecks may impact what’s under your Christmas tree this year. And some worry that could be negative for the economy and markets. But for every action there is a reaction and for every situation there is an investment opportunity.