By: Jon Costello
Five years ago this month, I wrote that real interest rates were so deeply negative that they “would have to increase several-fold to reflect the reality of a sustained inflationary environment.” That week, the 10-year Treasury yielded 1.61%. On Monday, it closed at 5.31%, its highest level since May 2002.
The bond market has now done what I thought it eventually would, while the stock market has not fully adjusted. I am not predicting a selloff. Higher interest rates tell me very little about where the S&P 500 will trade next month. They do, however, tell me what I should be willing to pay for every investment I consider, and today the answer is less than what I would have paid when the 10-year yielded 2%.
That applies directly to the energy-income securities we own and consider for the HFIR Energy Income Portfolio. For most of the post-financial-crisis period, those securities competed against an unusually weak alternative. Today, investors can earn more than 5% from the U.S. government without taking business risk, although longer-dated Treasuries still carry interest-rate risk. That raises the hurdle rate for everything else.