Today we have had a ‘slow motion’ assault on the 3% mark on the 10 year treasury. There doesn’t seem to be specific news to account for this move, but the key here is it is a very slow move–a snails pace almost. We all know that ‘speed kills’–and it is very easy to miss the lower income security prices–1, 2 or 3 pennies being lost on the average day doesn’t garner headlines. The AVERAGE price of the preferreds and baby bonds is moving slowly–very slowly, lower, but these moves tend to get obscured by payments of dividends etc. so you don’t notice these glacial paced moves lower.
While the Producer Price Index (PPI) came in a little lite of expectations today there is a continuing amount of chatter about inflationary pressures. There is not too much doubt in my mind that there truly are pressures. With crude oil trading around $70/barrel and the huge jumps in building material costs we have seen in Minnesota there simply has to be inflation at a higher rate than we have seen reported. We see home builders in our area of rural Minnesota asking 10% more for new construction than they were just 6 months ago–they claim it is all about material costs.
Tomorrow we see the Consumer Price Index (CPI) being announced and this is the more important report. While the PPI report is mostly ignored, the CPI doesn’t get ignored if it is off the consensus. The year over year consensus is 2.5%-if we were to see a 3% print you can bet that interest rates would react strongly.
The bottom line is I still believe that 3.25% on the 10 year is the right number for the end of the year. If we saw this rate on a straight line basis the rates would move higher by 4 basis points a month throughout the balance of the year. We would be very happy with that result.