Right now PSEC PPS is 11.10 with a yield of 11.79%, and 10 year is at 2.76%. In the future if rates go up 2% with the 10 year at 4.76% and PSEC yield maintains same risk/reward ratio its yield will be 13.79% with a PPS of arround 9.60, or a 13.5% drop in PPS. It would take 13 months of dividends to cover the PPS loss...........
Everything I have read shows PSEC and many other BDC's are poised to benefit from higher rates. Not saying it might not drop a little initially. Maybe you are confusing BDC's with mREIT's?
No, MREITS such as ARR, NLY, AGNC have huge leverage (7, 8 times) in their loan pool thus they really get killed by higher rates which cause their holdings to drop in value and nav to go down even if they have better earnings. That is why MREITS have already taken huge hits. BDCs do not have that leverage but they do have the type of market risk that has already been discussed, that plus the fact that BDCs have to pay out 90% of earnings keeps BDCs PPS capped.
I have a question for all. If the 10 year rate increases by 2% as stated above- how does that force PSEC's stock price lower? What are the calculations used here or what are the factors that drive this?
"If the 10 year rate increases by 2% as stated above- how does that force PSEC's stock price lower? What are the calculations used here or what are the factors that drive this?"
The math based upon those assumptions is pretty straight forward. Assume the 2% increase increase in the 10 year also increases the PSEC yield (big assumption). If so, then, PSCE dividend rate is 13.79% (11.39+2). 1.32/.1379=9.57. So if PSEC maintains its 1.32/sh dividend, it would trade at 9.57 to yield 13.79%.
The issue is the assumption that the spread between the 10 year and PSEC would remain the same. So far the 10 year yield has gone UP over 1% and the yield on PSEC has gone DOWN. I don't believe that it would continue forever, but a 2% increase in the 10 year should not (in my view) mean that the yield for PSEC would have to go up. The spread would still be 7% from 4.7% to 11.7% and would be enough. If the ten year went to 7% or 8 %, I'm sure that the PSEC yield would have to go up to maintain a 5-6% spread, but that should be a long time away and, as many have pointed out, the income side of PSEC has variable rates , which would help increase the income. But if the 10 year was at 7-8%, the underlying investments (NAV) might be more of an issue than the raw yield.
sell now, kick self if PSEC goes up dramatically in value in the next week
hold on, kick myself if my dividends reinvested from now on receive a yield of 13.79%?
Slicktop4- PSEC is a great stock to hold as it pays a great dividend. However... Equally important is your purchase price on the stock. If you are going to hold PSEC, I recommend shooting for an average share price of below book value- which is currently slightly above $10.70. I plan to purchase more PSEC. But I will not until its price drops below $10.50. And it will at some point. If you want to trade PSEC, well have at it. Thats just not my game with that stock. Lastly, I think the outlook for PSEC is real good. They are positioned to do well with rising rates, which certainly cannot be said for almost all mREITs and some BDCs. However, I will not consider adding more shares at these prices as I know a better price can be had in the future. Do some research and look at the recent insider transactions that occurred in 6/2013- prices paid were between $10.28 to $10.50. Buy at that price and hold long term. You will be happy. But you will have to be patient and wait until that time comes along again.
If the 10y yield goes to 4.76%, PSEC will be the least of your worries. The government can't afford to be issuing 10y notes at that rate. The debt service would swallow the budget. They would either have to raise taxes on everyone, middle-class included, or induce an inflation that would enable the interest to be paid with cheaper and cheaper dollars.