After the 19 basis point rise in the 10 year treasury yield last week this week is starting off with a 3 basis point increase. Trading seems firm in the 1.13% area.
The continuation of rates will start to ‘bite’ a bit each step of the way for holders of low coupon preferreds and baby bonds, although it is a story of ‘how high, how fast‘.
Last week the 19 basis point increase was right on the edge of an increase that could set off some panic selling in income issues. On a historical basis an increase in the 12.5 basis point area in a day gets the attention of investor with a 25 basis point increase sending investors to head for the exits at a hurried pace.
As I noted on the ‘Monday Morning Kickoff this morning the investment grade issues took a bit of a beating last week being off around 2%–they were also the issues that were most overvalued.
For conservative income investors most concerned with ‘immediate income’ instead of total return these drops help to make safe income more affordable, although you capital will drop if rates continue higher. Bottom line is if you liked a low coupon security 2% higher you should be loving it now.
If you have watched the business news much today you have seen a lot of talk on inflation—and inflation expectations are driving rates. Certainly energy prices, which have moved sharply higher in the last month would indicate some inflation is coming into the system, but I think expectations on new ‘stimulus’ is the main culprit. With the new administration coming into power there is some expectation of giant stimulus–maybe a $3 Trillion dollar package–but we shall wait and see.