Higher interest rates are rippling through the market again
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That sound you hear — on Wall Street, among homebuyers and among those who wring their hands about the U.S. government's fiscal position — is people realizing how much a surge in borrowing costs over the last few weeks is going to cost them.
Why it matters: The latest movements in the bond market mean more shoes may drop as the world adjusts to markedly higher rates — which were briefly at higher levels last fall, but aside from that episode, have not been this high since 2007.
- The 10-year Treasury note yielded 4.58% Tuesday morning, up from 3.86% on Feb. 1.
- That helps explain why April has been a bad month for stock market investors — with the S&P down about 4%. Higher rates for a longer period imply, all else equal, that stock valuations should be lower.
- Higher rates make the large U.S. fiscal deficits more costly; the Committee for a Responsible Federal Budget estimates interest costs alone are on track reach 3.2% of GDP next year, a new record.
State of play: It may create sticker shock among those looking to buy a house. The average 30-year fixed-rate mortgage was 7.43% Monday, per Mortgage News Daily, up from 6.63% at the start of February.
- A world of higher rates for longer "seems to be an increasingly real possibility in the eyes of market participants, as well as some homebuyers and sellers," writes Hamilton Fout, vice president of economic and strategic research at housing finance giant Fannie Mae, in a post.
- He added that "the recent move upward in rates is yet another headwind to the recovery of home sales, and it intensifies longstanding affordability challenges for consumers."
Between the lines: Bond investors are losing confidence that the era of high inflation is ending on its own and the Federal Reserve will soon be able to declare victory and offer relief on rates.
- Notably, the rise in rates in the last several weeks has been driven primarily by a surge in real rates, not higher inflation expectations. It's not that investors anticipate higher inflation than they did two months ago, it's that they think the Fed will have to exert more pain to get there.
- The yield on five-year inflation protected bonds, for example, was 2.18% Tuesday morning, up from 1.63% on Feb. 1.
What they're saying: "We subscribe to the higher-for-longer view for interest rates due to our expectation that structural factors will keep economic growth resilient even as inflation remains stuck above the Fed's 2% target," writes Matt Eagan, portfolio manager at Loomis, Sayles & Company, in a note.
- "The upshot is that, when the rate cuts start, and we do believe that they'll start, it will be a much shallower reduction than we would normally [see] during times of structurally declining growth and inflation," he writes.
