An Assiduous Reader writes in and says:<\/p>\n
A question: How does a retail investor hedge out interest rate risk on perpetual preferreds?<\/p>\n
Is there any simple, or reasonably efficient, way to do this?<\/p><\/blockquote>\n
Well … they can’t, really, which is one reason why I recommend that no more than 50% of a fixed income portfolio be in preferreds.<\/p>\n
However, investors should be aware that the Modified Duration of a PerpetualDiscount is simply the inverse of its yield (see http:\/\/www.prefblog.com\/?p=2582<\/a>). With yields at about 7%, this means a MD of about 14 years. Many investors will blithely purchase 30-year strips while fussing about the interest rate sensitivity of perps.<\/p>\n
I’ve written an essay on Perpetual Misperceptions (see http:\/\/www.prefblog.com\/?p=1308<\/a>) … there will be many more!<\/p>\n
Perpetuals do have interest rate risk and – more importantly – inflation risk, but I suggest this be addressed in the rest of their portfolios; common stock in resource companies, for instance, or a shorter-than-otherwise-indicated duration in their bond portfolios. At one point – I haven’t done the calculation recently, it’s probably even better now – a taxable investor could swap his Universe iShares into perps and Short-Term iShares on a duration neutral basis and pick up a point in yield. (see http:\/\/www.prefblog.com\/?p=2399<\/a>)<\/p>\n","protected":false},"excerpt":{"rendered":"
An Assiduous Reader writes in and says: A question: How does a retail investor hedge out interest rate risk on perpetual preferreds? Is there any simple, or reasonably efficient, way to do this? Well … …<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[23],"tags":[],"class_list":["post-5524","post","type-post","status-publish","format-standard","hentry","category-reader-initiated-comments"],"_links":{"self":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/5524","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=5524"}],"version-history":[{"count":0,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/5524\/revisions"}],"wp:attachment":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=5524"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=5524"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=5524"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}