Breakout

Income Growth Is a Bigger Threat to Economy Than Rising Rates: UBS’s Cummins

Breakout

It's been dubbed the worst month for bonds in a generation. The 70% rise in the 10-year Treasury (^TNX) yield that took the benchmark bond to 2.75% from 1.60%, became the talk of Wall Street amid worries that things had gone too far, too fast.

The effect, at least in the short-term, has been a shocking slowdown in the number of people applying for mortgages, but it remains to be seen if the uptick in borrowing costs will have a broader economic impact.

"The back-up in rates is probably not enough to derail the recovery, but it could take a little bit of steam out of housing," says economist Kevin Cummins from UBS Investment Research, in the attached video. "Housing is likely to remain a positive contribution to GDP."

Cummins acknowledges that the mortgage market is especially sensitive to speculation about the future of the Fed's asset purchase plan, and says the central bank chief will have to "carefully walk the line" in conveying the benefits of economic recovery versus the headwinds of less accommodative policy. Ultimately, however, he takes some comfort in the fact that historically, mortgage rates of sub-five percent are still very low.

"We'd have to see a much sharper rise in rates to really meaningfully impact and cause worry about derailing the recovery," he says. "They'd have to move up a couple hundred basis points before you'd really start to get very concerned about the back half of this year and the recovery."

Barring this sort of "dramatic rise in rates" Cummins says he is focused on another threat: income growth.

"More important for the housing market will be income growth," he says, since that is based on employment gains, which at the current pace of roughly 200,000 a month, he says, is enough to fuel wage growth which spills over to consumers and beyond.

So while rates have moved a lot in a little time, the bottom line is it's probably not enough to meaningfully damage the economy... yet.

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