The 10-Year bond is almost at 3%, which pretty incredible as
in early May it stood at 1.63%.
Depending on your time frame, this is one of the larger moves of
all-time:
Since interest rates affect every other asset class and the
economy, let’s see how this rise has filtered through and the possible reasons why:
- Emerging market assets have gotten crushed - See India. Reason: Investors move out of higher yielding emerging market assets as they now have a higher rate of interest here. As assets move out, their central bank has to sell Treasury Bonds to accommodate currency flows, reinforcing the problem.
- Mortgage rates are up big - Reason: Fed tapering includes Fannie and Freddie bonds, which are pooled mortgages. Less demand via Fed and the market (given the Fed’s move) means higher interest rates on those bonds and the subsequent mortgages tied to them.
Note: Interest rates rise and bond prices fall. If there is less demand then the price will fall, thus equating to higher interest rates.
- Real Estate in general hasn’t fared too well - See Homebuilders and REIT ETFs. Reason: Higher interest rates = higher mortgage rates (see #2) = higher cost of purchasing a home = less demand.
- Stocks are up - See SPY. Reason: Fed’s taper and economic data indicates improving (slightly) economy > higher revenues > higher earnings. This is a positive change, as in the recent past there have been times where weak data has meant more easing, lower rates, and higher equities.
Of course other markets are moving, this is just a snapshot.
Yet, the following presents the most interesting questions moving forward:
At what point do rising interest rates, or the pace of that rise, compress earnings given higher borrowing costs and lower consumption? Alternatively, will the economy improve enough to cancel out the earnings hit? If not, will the Fed un-taper?
While the debt ceiling, government shutdown, Syria, etc.
will take all the headlines, to me rising rates and how they filter through the
economy are the biggest risks moving forward.
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views and opinions expressed herein are those of the author(s) noted and may or
may not represent the views of Capital Analysts, Inc. or Lincoln
Investment. The material presented is provided for informational
purposes only. Nothing contained herein should be construed as a recommendation
to buy or sell any securities. As with all investments, past performance is no
guarantee of future results. No person or system can predict the market. All
investments are subject to risk, including the risk of principal loss.
