Interest rates on bonds maturing more than a year in the future have risen since our last update on income equities.  At the end of November, the 10-year US Treasury bond yield was a little less than 1.00%.  Today, the yield is about 1.45%.  Short-term interest rates that are fully controlled by the Federal Reserve have not changed and remain close to 0.00%.  This means that the yield curve has steepened.  Intermediate and long-term rates have risen in anticipation of improving GDP growth resuming strongly with pent up demand driving growth well above the trend of the last few years prior to the pandemic.  Also contributing to a steeper yield curve is an increase in inflation expectations related to the anticipated surge in economic growth.  The Fed has not changed its market and economy friendly policies, continuing with extremely easy monetary policy.  There is concern among investors, however, that the Fed will beginning “tapering” or pulling back on its accommodations sooner than expected.

Rising interest rates are never good for bond returns and so far this year, the Barclays U.S. Aggregate index (AGG) has a total return of -2.2%.  AGG is similar to the S&P 500 in that it is a widely accepted benchmark.  Municipal bonds and high yield bonds have held up a little better, each down less than 1% this year, as these sectors of the bond market are most sensitive to the outlook for economic growth.

Against a backdrop of rising intermediate and long-term interest rates, Northlake’s income equities have performed fairly well.  The preferred stocks of Liberty Broadband (LBRDP) and Qurate Retail (QRTEP) are down slightly in 2021.  This would be expected as preferred stocks are most equivalent to regular bonds.  The slightly lower prices have no impact on the well above market current yields that attracted us to these securities in the first place.  LBRDP pays a dividend that supports an 8% current yield.  QRTEP produces a dividend yield of over 6%.  We remain highly confident in the credit quality of both of these securities.

Lamar Advertising (LAMR) and VICI Properties (VICI) are both up so far this year, helped by the rise in the stock market, rotation toward economic reopening stocks, and excellent earnings reports.  LAMR operates billboards in mostly second-tier cities and benefits as mobility improves and people get back in their cars.  VICI owns casino properties and is paid rent by operators like Caesars Entertainment.  Regional casinos have recovered well from COVID, while Las Vegas is improving but lagging.  Importantly, the credit quality of VICI’s tenants is getting support from quickly developing sports betting and online gaming for slots and table games.

Verizon (VZ) is down so far this year due to heavy spending for spectrum to support its 5G rollout and a very competitive mobile communications environment as consumers are enticed to upgrade to new 5G enabled phones.  The latest major spectrum auction was just completed and VZ has plugged the hole in its spectrum and improved its competitive position.

Finally, the iShares Select Dividend ETF (DVY) has done quite well this year as its holdings are mostly companies benefiting from the rotation trade.  The DVY portfolio contains many cyclical and value stocks including heavy exposure to financial and energy stocks.  All of these themes have been leading the market in 2021.

Northlake expects the yield curve to steepen further later this year with the 10-year U.S. Treasury yield moving towards 2.00%.  This will put pressure on bond returns, but income equities should still be able to produce positive total returns from current levels as the economy reopens.  We continue to look for income ideas to add to client portfolios including adding current holdings outlined in this blog post to more client portfolios.

AGG, LBRDP, QRTEP, VICI, LAMR, VZ, and DVY are held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.