Dynex's floating Series C already pays a higher coupon than its new 9.375% fixed preferred

The 6.9% in the Series C's name describes a coupon it no longer pays. The share now floats, and according to the Seeking Alpha author its rate is already above the 9.375% on the new Series D ^[1]. Taking that at face value, the float has added more than 2.475 percentage points to the original coupon ^[17]. The author expects the next reset to add more, since three-month SOFR is higher than it was three months ago ^[10].

So Dynex is raising new fixed money more cheaply than it pays on its older floating money ^[2][1]. A Series D buyer gives up a floating coupon that rises with short rates and takes a fixed one. Against a 10-year Treasury above 5% ^[3], the 9.375% leaves a spread of less than 4.375 points ^[16]. That spread is measured on par value, because the note does not give a market price for the shares. The author wrote, "I would be excited about that coupon rate if Treasury yields were lower." ^[12]

Floaters are not a clean hedge either. Rising yields have also hurt some fixed-to-floating and already-floating preferreds ^[5]. The author puts that down to falling common share prices spilling into the preferreds, and says it is not a big worry ^[5]. The harder problem is price: many floaters are not offering bargain values, and many investments are not offering a large spread over Treasuries ^[6].

There are three ways this plays out. If the 10-year keeps rising, the Series D's price takes the loss while the Series C's coupon keeps climbing. If yields reverse, the fixed 9.375% becomes the share to own and the Series C's coupon follows SOFR down. If the Fed hikes while the long end stalls, the floater wins on income, and the call risk becomes the thing a holder has to price.

I think the caution on the Series D is right for as long as the 10-year is still rising. The counter-thesis is that a fixed 9.375% from an issuer the author ranks among the safest ^[8] is exactly the income an investor wants locked in before yields turn. A buyer at a 10-year above 5% looks well-timed if 5% turns out to be near the top.

The author is acting on the caution. Cash is about 28% of the portfolio, with another 4.8% in TWOD shares tendered for cash, about 32.8% combined ^[7]. "That is an extremely defensive positioning," the author wrote ^[13]. By the author's account the situation is strange, since many of the investments the author is interested in trade at lower multiples than before ^[15].