Interest Rates “Want” to Go Higher

As I suspected would happen we didn’t see the 10 year treasury spend too much time in the 2.70’s%.

After spending almost the entire month of March in the 2.80-2.90% area rates fell into the 2.70’s in later March and into the first 7-8 days of April. Then yesterday rates popped by 6 basis points–based on?  Maybe a touch of inflation is in the air as we see crude oil prices touch levels not seen for a long time–3-4 years.  Add to this the spouting of Fed presidents talking about rate increases and you have a recipe for higher rates.

This morning we are right around 2.90%.  We have entered the territory where we could get a knee jerk move to 3% or a touch higher—this could set off a short term panic in perpetual preferreds–if rates were to move 10-12 basis points in a day.

Income investors need to be mentally prepared for this possibility–and a little dry powder would be helpful as bargains may arise.

As we have contended for maybe the last 6 months rates are very firm based on huge treasury issuance to fund the deficit as well as continued runoff of the Fed’s balance sheet (although this has been modest to date).  If the economy is just “so-so”, which is what we believe, rates can still move substantially higher.

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