T Rowe Price chief economist is out with a call for the benchmark treasury heading to 5%–darned near a point higher than where we are currently positioned. The 10 year yield is up 9 basis points this morning to 4.16% and this is getting a bit critical for income issue pricing.
This situation puts us in a bit of a bind–severe capital losses if it even gets close to 5%–and dropping rates on CDs and money markets. I model a 10-15% capital loss at 5%. Many folks are simply happy to ride out the storm and collect their dividends and interest payments—I am about total returns and capital losses are painful since I am not drawing any retirement accounts payments and still are focused on building accounts up.
The best position is short duration securities which will move much less than either perpetual preferreds or long dated baby bonds. Higher coupons are better than the low coupon, high quality issues for retention of capital.
I am surveying my holdings and will likely ‘rearrange’ the portfolio somewhat–the juicy capital gains will be retained to a fair degree.