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Extending Duration?

John Lekas CEO & Senior Portfolio Manager

December 20th, 2023

By extending the duration in our portfolio 100% at this juncture using 10-year treasuries (based on a target rate of 3% in 2024), we would generate approximately 8% in capital gains. Additionally, we would receive a 3.75% coupon, resulting in a total return of 11.75%. Our fund will return around 9.42% this year. Assuming an apples-to-apples comparison in 2024, there is a difference of 2.33%.

LCTIX pays a yield of 7.07%. Most of our competitors will be cutting their dividend. Currently, the 10-year treasury has a duration of approximately 8, as opposed to our duration of 0.89. If the Federal Reserve decides to maintain rates instead of cutting, we could experience negative returns by extending duration here. Technically, treasuries are overbought at this point.

Our position has been that until the U-3 unemployment number reaches at least 4%, we do not believe the Fed will cut rates. Inflation is being driven by high wages, making the U-3 more relevant than the CPI. Although price inflation from commodities has significantly tapered back, a low dollar could lead to a rise in commodities, especially gasoline. Given that it is an election year, higher prices are a big loser for the incumbent. Opting for inaction may be the simplest move for the Fed. We have increased our duration from 0.26 to 0.89 but prefer to see the trend confirmed before extending further.

Despite the rally in treasuries, we anticipate finishing the year as either #1 or #2 in our space out of approximately 625 funds. We will update our view when the next U-3 unemployment data comes on January 5, 2024.

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