Huzzah! Housing starts jumped in April to an annualized rate of 1.135 million units, according to the Commerce Department. That’s the highest level since November 2007. Building permits also surged 10.1%, a hopeful omen for future construction activity.
But why are we cheering? Partly, of course, housing is because a key sector of the economy seems to be doing a little better. We’re always happy when businesses are humming and people are working.
On a slightly deeper and subtler level, I’m also pleased with the bond market’s reaction to the housing news.
Yes, bond prices dropped, and yields rose after yesterday morning’s housing release. The benchmark 10-year Treasury spiked to 2.3% in the early going, up 7 basis points.
However, the selling remained orderly and didn’t turn into a rout. At the close, the tenner fetched 2.29%, a muted response to what traders, in other circumstances, might have interpreted as a “dump your bonds at all costs” report.
In short, yesterday’s housing story reinforces my thesis that while the current backup in bond yields may have somewhat further to go, it won’t carry nearly so far as the famous 2013 “taper tantrum.” I’m still looking for the 10-year Treasury yield to top in the 2.4%-2.5% range, probably before midyear. Then down we slide again, though most likely not as far as the January low of 1.7%.
As the peak in yields comes into view, I expect to recommend some closed-end municipal bond funds again, as well as a few preferred stocks. Several closed-end municipal funds are already scraping their 52-week lows — an encouraging sign for bargain hunters. But I think we’ll be able to feast on a much broader menu a couple of weeks from now. Patience!
Meanwhile, I suggest focusing your new money on a handful of interest-sensitive utility stocks that have already undergone sizable price “corrections” from their 2015 highs. OGE Energy Corp. (NYSE:OGE) is a good example. OGE rates a “buy” with a current yield of 3.1%.
Telecom carrier BCE Inc (USA) (NYSE:BCE), parent of Bell Canada, posted better than expected Q1 earnings, driven by outstanding performance for BCE’s wireless business. Yet, thanks to general weakness among interest-sensitive names, BCE stock remains almost 10% below its 52-week high.
Buy BCE stock for its current yield of 4.9%. Note that if you hold BCE stock in an IRA or other retirement account, you can avoid the 15% Canadian withholding tax on dividends.
Electric utility stock Duke Energy Corp (NYSE:DUK) offers sound value. DUK isn’t growing nearly as fast as OGE, but Duke Energy has sweetened its dividend seven years in a row and will likely announce yet another increase around July 1. DUK stock’s current yield is 4.2%.
One utility stock that definitely merits a “hold” rather than a “buy” is NiSource Inc. (NYSE:NI). NiSource stock has exploded ahead of NI’s planned spinoff of its Columbia Pipeline Group subsidiary. The transaction is due to close July 1.
With NI yielding a slender 2.2%, I see little point in adding to your position at these levels. However, I think NiSource stock will probably appreciate even further once the bond market finds its footing. Thus, there’s no urgency to sell.
Who needs tech stocks? Lift a glass!
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won nine Best Financial Advisory awards from the Specialized Information Publishers Foundation.