If higher inflation persists after current goods shortages end, the Fed will have to face the political consequences of letting interest rates rise. In a short, recent test, bonds held up better than convertible preferreds.

In May, as in April, the possibility of Fed tightening aimed at heading off higher inflation preoccupied investors. The 4.2% year-over-year Consumer Price Index rise reported on May 12 well exceeded expectations. That day the benchmark Treasury yield reached its high for the month at 1.70%. The surge from the month’s lowest yield, 1.56% on May 6, constituted a mini-test of the various income categories’ comparative interest rate sensitivities.

Last month we reported that as Treasury yields surged in 1Q 2021, prices on ISI-recommended closed-end funds rose on average, while prices declined on ISI-recommended preferreds. This month we compare the performance of two other asset classes during May’s one-week rate surge—corporate bonds and convertible preferreds. Our samples consist of all ISI BUY and HOLD recommendations in force during May. (See www.isinewsletter.com.)