OLD Media Moves

Interest rates turning up

June 13, 2013

Posted by Liz Hester

As someone in the process of buying a house, I’ve watched interest rates climb steadily during the past couple of weeks. Each little tick up shaves more off my ability to save. Several stories Wednesday highlighted this fact and some of the economic conditions causing it.

The New York Times had this story:

It has been a reliable fact of life for investors, corporations and ordinary borrowers: interest rates, for the most part, keep heading lower.

But all of that may be about to change. For prospective homeowners, the cost of mortgages has been going up in recent weeks. Governments are also facing the prospect of higher borrowing costs down the road, and they are projecting increases to their debt burdens. Savers with money in bank accounts, on the other hand, have the prospect of finally earning more than a pittance on their deposits.

The interest rate charged by lenders, often cited as the single most important factor behind economic decisions, has been steadily going down for most of the time since the early 1980s, and has fallen to historical lows since the financial crisis. Over the last few months, though, investors and banks have been demanding higher payments for their loans, pushing up interest rates and bond yields.

The first tremors have been felt most sharply on investment products that were reliant on low rates, like bonds issued by American companies. But the movement is quickly spreading out into the real economy.

The Wall Street Journal’s David Wessel posted a thorough analysis of some of the underlying causes of volatility:

The tectonic plates of the world economy are shifting, moving the yield on the 10-year Treasury to the highest level in more than a year and shaking financial markets from Tokyo to Mumbai and Johannesburg to São Paulo.

For the past few years, the global economy, struggling to recover from a financial crisis, has relied on a few constants: The U.S. would print plenty of money and keep interest rates very low. China would provide a lot of demand and vacuum up commodities from around the world. And Japan was largely irrelevant.

Suddenly, all three of those are being questioned in markets, triggering paroxysms in stocks, bonds, commodities and—particularly, in the past couple days—the currencies of emerging markets.

The big questions hanging over markets and the global economy now: Is this is the inevitably bumpy beginning of a welcome return to normal—a world in which the U.S. economy doesn’t need big and repeated doses of monetary stimulus, Japan grows again and China’s economy gently slows to a sustainable speed?

Or is it a harbinger of more volatility in financial markets—perhaps the result of a misreading of the Federal Reserve’s policy intentions by the markets or a premature move by the Fed to cut back on easy money—that yields an unwelcome increase in market interest rates before the U.S. economy achieves what Fed Chairman Ben Bernanke once called “escape velocity”?

Answering those questions now is impossible.

I find that last part funny, since he goes on to try and do just that. But Bloomberg said stocks fell on Wednesday on more uncertainty:

Stimulus from the Federal Reserve and better-than-forecast earnings have propelled the bull market in U.S. stocks into a fifth year and driven the S&P 500 up 138 percent from a 12-year low in 2009. The gauge has fallen 3.4 percent from its record high on May 21, the day before Fed Chairman Ben S. Bernanke suggested the central bank could curtail its bond purchases, known as quantitative easing, if the economy improved in a “real and sustainable way.”

Investors get their next look at the health of the U.S. economy tomorrow, when reports may show initial jobless claims were unchanged last week and sales at retailers rose in May. The S&P 500 rallied June 7 after jobs growth in May beat forecasts. At the same time, bigger job and wage gains are needed to move the central bank closer to scaling back stimulus. Fed policy makers next meet June 18-19.

Concerns over economic growth and the pace of central-bank bond buying have led to widening swings in U.S. shares. That has prompted options traders to make unprecedented bets on equity volatility, pushing bullish and bearish contracts to records. Options outstanding on the iPath S&P 500 VIX Short-Term Futures ETN, tracking a gauge of VIX futures, climbed to an all-time high of 3.46 million on June 6, based on data compiled by Bloomberg.

What is certain is that interest rates will rise. That will make it interesting to see if the rebound in the housing market will continue or if potential buyers will be scared off by volatility or rising rates. That could also have hard ramifications for Wall Street as it tries to generate more fees to offset those it has lost.

The only people likely happy about the situation are the volatility traders.

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