This $12.5 Trillion "Reinvestment Tsunami" Hits in Two Weeks
And today's 14% income play could help keep you clear ...
It’s a tough time for income investors.
Indeed, author James White recently nicknamed it the “Maturity Tsunami.”
Truth be told, I think White nailed it …
U.S. Federal Reserve policymakers are expected to cut interest rates at their meeting next week. That’s good for house hunters and corporate borrowers. But it’s not great for savers or income investors, especially with that “tsunami” due to hit in October — when $950 billion worth of high-yielding certificates of deposit (CDs) start coming due and must be reinvested at lower rates.
And that’s just the “first wave” … about $2.5 trillion in deposits will come due over the next 12 months, says The Financial Brand, a trade journal for the banking industry.
And there’s still more: Holders of an additional $8.9 trillion in government debt will also be out hunting for “reinvestment” opportunities, White and other experts say.
In short, what you’re really looking at here is a “Reinvestment Tsunami” approaching $12.5 trillion. And it’ll hit the average saver — the retail investor — the hardest.
“Unlike [corporate] CFOs who negotiate rates as finance professionals, [regular] people managing their finances are faced with a chore – not unlike doing their taxes,” writes White, the banking general manager at Total Expert, a Minneapolis tech firm that works with financial institutions. “It’s an expensive chore in terms of time and stress.”
Investment pros refer to this as “Reinvestment Risk” – which is just what it sounds like. You’ve got money stuffed away in something good – but that “something good” expires or comes due – and the “reinvestment” alternatives just aren’t as good.
THE TRUE WAY TO “SEE” INCOME
I get it. Like White says, it’s frustrating. And the true challenge is even more daunting than the mere numbers convey.
So let me lay it out to you straight: Unlike you and me and the community here at Stock Picker’s Corner (SPC), most folks really don’t get income investing.
And I mean … don’t get it at all.
As I’ve explained since the launch of SPC, most folks look at “income” the wrong way. They look at the “nominal” yield — not the real return … the flow of cash that ends up in their brokerage account … or their pocket … after taxes, inflation or other “afterthought” costs are backed out.
I’m oversimplifying this, but it’s kind of like taking out of a mortgage and looking at the stated interest rate, but never considering the payments, closing costs, property taxes and insurance.
With income plays, it starts with the “risk-free” rate of return – right now the 3.73% yield of the 10-year U.S. Treasury. For some context, the six-month Treasury is 4.69% and the four-week T-Bill is 5.11%.
That’s jarring. Shorter rates are higher, which means if you grab those, you’ll face the same reinvestment risk very soon. And those near-term rates will be even lower after the Fed cuts rates very soon. (And some prognosticators are now saying the Fed could “front load” those rate cuts – meaning policymakers make bigger cuts now, instead of incremental cuts over a longer stretch – because the economy is weakening at an accelerating rate, and it’ll take time for those lower interest rates to work their way through the system.)
“It’s tough,” financial advisor Jeremy Keil told Yahoo! Finance. “The highest rate today is the shortest rate, and so if you lock in again here for a year or more, you’ll probably get a lower rate than you could today with a money market.”
And that’s if you’re looking only at the market interest rates.
There’s also the inflation rate — officially 2.9% right now, though many folks say it’s really higher. And don’t forget taxes — with the top tax brackets right now at 24%, 32%, 35% and 37%.
Account for all those factors, and consider them from a cash flow perspective: In short, you need to ask:
How much is actually going into your pocket?
How much is that cash worth in “real” (adjusted) terms?
And does the yield you’re getting put you ahead of the prevailing rate — but not so far ahead that you’re up in stratospheric-risk territory?
In short, you want to make sure your investment puts you ahead of the market rate — while avoiding excessive risks.
THE 14% YIELD PLAY
Why am I putting such a fine point on this?
That’s easy. The fact is … income matters. A lot.
Engineered correctly, an income portfolio can smooth out your entire portfolio. It can throw off cash for current expenses. It can even serve as the “raw material” for future Wealth Builder stock investments.
Several of our best income picks are detailed in this “Income Playbook Dossier” for our SPC Premium family members.
But with central bank policymakers expected to act soon – and with my advice to avoid “Rate Cut Roulette” – I wanted to give all of our readers some income plays to research.
So let’s get started … with an income investment you can make today – before the “Maturity Tsunami” begins.
The “SPC Income Play” that I’m bringing you today is AGNC Investment Corp. AGNC 0.00%↑. Its recent yield is 14.23%. And its share price is $10.20
BUYBACKS AND DEMAND INCREASES
Here’s the Deal: AGNC is a real estate investment trust (REIT) that invests in residential mortgage securities. It’s based in Bethesda, Md., a little under two hours from my home office.
As the chart above shows, the stock has surged in recent months – in anticipation of the Fed rate cuts that would widen its net interest spreads and dial down the funding-cost pressures the company has been dealing with. If that happens, AGNC’s dividend could increase.
One powerful “trigger” for AGNC — the stock — is that “Reinvestment Tsunami.” With trillions in fixed-income investments, investors facing reinvestment risk will be shopping for those “re-investments.” And that 14% yield … the imminent Fed rate cuts … and the upside potential … well, that could drive that $10 share price much higher over time.
And AGNC’s buyback program will provide a helpful tailwind. In 2021 and 2022, the company bought back 17.7 million shares ($281 million) and 4.7 million shares ($51 million), respectively, says Zacks Investment Research.
There were no buybacks last year — or in the first half of this one — which means there’s still $1 billion left on a buyback program that’s supposed to be wrapped up before the end of this year.
This goes back to my “Econ 101” approach to investing: Buybacks slash the “supply” of available shares.
At current levels of demand, that should elevate the price. But with the “Reinvestment Tsunami” approaching, folks will be hunting for income plays with “real” returns.
Like those dangled by AGNC.
And that means demand for the shares will increase.
Increased demand – with slashed supply — should mean a nice bump in price. And even after that price goes up, your “yield on cost” — the dividend you’re getting on your original purchase — will remain at 14% … or higher, if the dividend gets boosted.
And that 14% dividend: It’s ahead of the 11% average of its peers.
Federal law demands that REITs distribute 90% of their taxable income as dividends. One of the cool things about AGNC is that it’s been paying its dividends monthly.
With any investment, there are risks. And AGNC is no exception — especially given that super-high yield.
High rates have slashed AGNC’s book value/share (BV/S) — which was down nearly 37% year-over-year as of June 30. But now that the Fed is reversing course, that issue should reverse course, too.
Through the years, there have been times when it cut that dividend — like, in April 2020, when it pared that payout from 16 cents a share to 12 cents.
That shouldn’t be an issue in the near term, however. Between the looming rate reversal — and the fact that AGNC marked the year’s midpoint with a healthy $5.3 billion in cash and securities — the dividend should be good for now, and perhaps increase.
There you have it … a “real” income play you can make today.
And I’ll be back with more.
See you next time;
