How high can interest rates go? As Jackie Gleason might say, "Straight to the moon, Alice!"
A slowdown in the housing market is especially problematic because the broader U.S. economy has leaned so heavily on housing for support.
During the first quarter of 2013, residential investment contributed almost one-third of a percentage point (0.31%) to GDP. If a rebounding housing market has boosted economic activity and GDP that much, what will a souring housing market portend?
A Trillion Dollar Headache
Higher interest rates and excessive debt is always recipe for disaster. And the student loan marketplace is ripe for mayhem.
Currently, there's over $1 trillion in outstanding student loans, which after mortgages, is the next largest source of household debt. By comparison, student loans were just $240 billion a decade ago.
Surging interest rates will increase student loan defaults and already $8 billion of private student loans have defaulted, according to the Consumer Finance Protection Bureau.
Perspective on Rates
The chart below gives us some historical point of reference about interest rates. It shows the yield spread (or difference) between 10-year Treasury yields (IEF - News) and the Federal Funds Rate (FFR).
You'll notice how the yield spread between both benchmarks has never been more than 400 basis points or 4%. And today, with 10-year yields now around 2.90% and the FFR between zero and 0.25%, the 10-year yield would need to shoot up to 4.25% to break historical records. That leaves a potential 1.35% upside in 10-year yields, should the FFR hold steady and should rate relationships stay within their historical limits.
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