In May, the 10-year Treasury bond yield rose 54 basis points to 2.24 percent in the span of one month. Economists have been predicting the eventual rise in interest rates, but a jump this big in such a short time frame raised a few eyebrows.
According to a recent report from Casey Quirk, U.S. investors facing uncertain bond markets will shift about 15 percent of their current ﬁxed-income allocation (an estimated $1 trillion of assets) to strategies designed to help protect them from inﬂation and rising rates. These defensive strategies may include global and emerging market bonds, high-yield and loan portfolios and alternative ﬁxed-income products.
On June 19, Federal Reserve Chairman Ben Bernanke confirmed that the central bank is ready to slow its bond-buying program amid signs of an improving economy and housing market. While there are increased signs of growth in the economy, employment numbers still lag. However, any talk about rising interest rates is generally a good sign of economic growth.
On the housing front, while higher interest rates put a damper on low-cost mortgages, the news could be good for homebuyers. This prolonged era of low rates and low housing prices has spawned a proliferation of investors outbidding potential homebuyers thanks to cheap money and a robust rental market. Rising interest rates may serve to curb the flurry of investor-driven purchases, allowing more opportunities for homebuyers to live in new homes.
Since rates are still historically low, they’re not likely to douse the enthusiasm of pent-up homebuyer demand. When it comes to mortgages, banks are still hesitant about extending credit for both new and refinanced loans. Approval criteria is based on a combination of factors, such as loan-to-value, debt-to-income and credit scores.
However, according to Zillow Mortgage Marketplace, there was a 570 percent increase in the number of lenders offering conforming loan quotes with down payments of 3.5 to 5 percent in March 2013, compared with data two years earlier.1 Because the refinance craze has decreased in recent years, banks may need to be more liberal in the future in order to compete for this business.
If you’re wondering how rising interest rates may impact your financial situation, please contact us. We’re happy to give you a mid-year review in consideration of your financial objectives.
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