Interest Rates: The Good, the Bad and the Ugly

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.

 

[CLICK HERE to read the report, “When the Tide Turns: Building Next Generation Fixed Income Managers” at Casey Quirk, May 2013.]

 

[CLICK HERE to read the article, “A Reset for Bond Markets” at Fidelity.com, June 14, 2013.]

 

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.

 

[CLICK HERE to read the article, “Rising Interest Rates: How Investors Should be Positioned” at CNBC.com, June 18, 2013.]

 

[CLICK HERE to read the article, “Interest rates are rising! Here’s why we should be thrilled,” at The Washington Post, May 31, 2013.]

 

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.

 

[CLICK HERE to read the article, “Rising Interest Rates Could Mean Good News for Homebuyers” at mercurynews.com, June 17, 2013.]

 

1 [CLICK HERE to read the article, “Housing Seen Shrugging Off Loan Rate Rise as Banks Loosen,” at Bloomberg.com, June 21, 2013.]

 

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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The information and opinions contained herein are provided by third parties and have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by our firm. Content is provided for informational purposes only and is not a solicitation to buy or sell the products mentioned. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation.   

 

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