A Slow Motion Assault on 3%

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.

6 thoughts on “A Slow Motion Assault on 3%”

  1. Hi Tim, for interested readers, a reasonable (though probably not complete) list of utility preferreds which includes current pricing information is shown at the bottom of this page:


  2. Interesting correlation between your comment about 10% higher building material costs and the common stock prices of both HD and LOW. LOW’s in particular is almost to the mark, 10% higher today than it was 6 months ago. HD is doing just a hair better at about 12%. I’ve been long both of them.

    Common shares of just about every electric utility have had a horrible week, thus far.

    I think the biggest driving factors are both the price of oil and the number of vacant jobs – with the jobs issue leading to more wage inflation fears.

    Totally agree with the 3.25% target mark by year end.

    1. Thanks GW–I take price increases that builders tell me about with a grain of salt—I think a decent taste of the increase goes in their pockets (which is ok-but they fail to mention that part).

      I just think we are going to see a heating up of inflation soon–and our 3.25% target may fail to be high enough.

      The utility spreadsheet has prices changes turn blue when the fall in price is more than a buck/share–yesterday it was almost a solid blue. Today there is some blue but nothing like yesterday.


      1. I liquidated my common position in LNT and began liquidating XEL – all for profit (albeit less than it was!), but I had a low cost basis on these and still have common ownership in 5 more utes.

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