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Interest rates are slowly creeping higher



April 30, 2009 – Comments (2)

I have mentioned in the past that one of the key metrics that I am closely following is interest rates.  Traditionally low rates are good for the economy because they stimulate borrowing by businesses and consumers.  Conversely, high interest rates act as a drag on economic activity.

The Federal Reserve is doing its best to keep interest rates low.  It has lowered the Federal Funds rate to essentially zero and it has officially started buying Treasuries in an effort to narrow the spread between the funds rate and what consumers and businesses have to pay. 

One key interest rate that many follow is 10-year  Treasuries.  They traditionally have been very closely tied to mortgage rates.  For some reason through lately though I have seen a growing split between the two.  I heard yesterday that the average 30-year fixed mortgage rate is slightly over 4.6%, which is essentially the lowest that rates have ever been.  However, ever since the Fed announced that it will begin buying Treasuries in an effort to lower rates in Mid-March the 10-year has been creeping higher.

Perhaps Bernanke and friends are purchasing more MBS and mortgage paper than Treasuries because they are determined to keep mortgage interest rates low in an effort to put a floor under home values and to help current owners refinance at lower rates so they have more money to spend.  Either that or business has slowed some after the huge initial wave of refinance applications that overwhelmed banks and they are being forced to lower rates in an effort to attract more business.

Whatever the reason, the number that I am focused on today is the 10-year.  If the market begins to choke on all of the debt that the U.S. government has to issue to finance its growing budget deficit and interest rates continue to rise it is bad news for the economy. 

Even though I currently own a number of corporate bonds, I actually welcome a gradual increase in interest rates as an investor.  As long as I hold my current holdings to maturity I won't realize a loss on them and I can reinvest the interest that they pay in higher yielding paper.  That's how things would work in theory, but in reality I actually have seen a dramatic drop in the number of really attractive corporate bonds out there lately. 

I did one of my usual searches of the available bonds at Schwab the other day and the incredible bargains that I saw several months ago when I jumped into the bond market with both feet don't seem nearly as prevalent today.  That's probably a good thing for companies because it means that their cost of borrowing has probably dropped some, but it's not great for anyone who wants to buy bonds right now.

Anyhow, I've got to go but keep an eye on the 10-year.  I'm sure that I'll have more to say about it in the near future if it keeps creeping higher.


2 Comments – Post Your Own

#1) On April 30, 2009 at 7:52 AM, TMFDeej (97.71) wrote:

Here's a larger version of the above chart:


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#2) On May 03, 2009 at 4:10 PM, SmallCapsInvstr (78.35) wrote:

So what does this mean for us investors, that we should expect this rally to fizzle at some point and come back down?

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