In what is a move that is contrary to logic interest rates have continued to drift lower. The 10 year is at 2.76% as we write which is just slightly lower than yesterdays close, but 18 basis points lower than just a week ago when rates touched 2.94%.
Our personal viewpoint has been that the 10 year treasury would close the year around 3.25% driven almost entirely by the run off of the Fed balance sheet and the need for the treasury to raise almost a trillion dollars to fund the government debt. This continues to remain logical to us. Our problem is that markets are not always seemingly logical.
For the moment we will continue to hold this point of view on interest rates. We have a long way to go before this year is over and so much government debt to sell that it is hard to change our logic. Our entire investing strategy has been based upon rates moving higher. We have built our portfolios based upon shorter maturity holdings. By holding shorter maturity issues we have to forego about 1% in yield as perpetuals generally are higher yielding. At what point do we throw in the towel and admit we were wrong?
We will not make any wholesale changes in our holdings if we are wrong. We will simply “ease” into select perpetuals, both fixed rate and fixed to floating rate issues. It is not urgent that we gain extra yield–sleeping well at night is much better.