Yields on the benchmark 10-year U.S. Treasury note hit 2.27% at one point Tuesday, the highest level in more than a year. It was part of a global bond selloff tied to investor disappointment that the Bank of Japan held off on taking new measures to stimulate the economy and support markets. But it’s a continuation of a trend we’ve seen recently, with the interest rate on 10-year U.S. government bonds rising above 2% in recent weeks.
So what impact does this have on markets, the economy and on ordinary Americans? Peter Tchir of TF Market Advisors, a New York research, asset management, and consulting firm, puts it quite simply in a recent note: “Rising Rates are Bad.”
Tchir notes they are particularly bad when it comes to one of the bright spots for the U.S. economy: housing.
“This whole housing recovery that we’ve seen over the past year has been at much lower rates, so we’re very concerned,” Tchir, who has traded over $1 trillion of fixed income products during his career, tells The Daily Ticker in the accompanying video.
Rates for a 30-year fixed mortgage tend to track the 10-year Treasury rate very closely. The national average 30-year fixed mortgage rate has risen from 3.52 percent to 4.1 percent in the last five weeks, according to Bankrate.com.
The recent increase adds $100 onto the monthly mortgage payment for the typical, $245,000 house, according to Tchir. Although rates remain very low based on historical standards, he thinks this is significant headwind for potential buyers who have been on the fence. And he counts a lot of people in that category given the lack of growth in high paying jobs during the economic recovery. Tchir points out much of the job growth post-recession has come from lower paying, service-oriented industries or in temporary services.
Indeed, according to Fed Governer Sarah Raskin, as reported by the Los Angeles Times, a little more than half of the job gains since the recovery from the financial crisis have been in lower-wage occupations such as retail sales and restaurant work. That’s even though these jobs represented about one-fifth of the jobs lost as a result of the recession.
As for housing, mortgage applications (particularly for refinancing) have dropped in recent weeks. Tchir thinks we could see a real slowdown exacerbated if and when the Federal Reserve begins to taper its bond-buying program, which would remove support for housing.
Tchir thinks the central bank will begin pulling back on bond purchases due to growing concerns that monetary policy is “screwing up the markets,” though Fed officials may attribute tapering to an improving economy. He thinks an announcement is coming soon, but check out the video above to hear his prediction of when.
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