The short term interest rate increases from the FED are affecting our Personal Finances. The recent spike in the yield of the 10-year Treasury note to 3.25% is the highest level since the Spring 2011. You can expect your borrowing costs and investment accounts to be affected. The yield on the key U.S government bond influences everything from fixed-rate mortgages to stocks.
The recent surge in the so called long-term bond is alerting Wall Street economists and money managers. Why? It’s the latest sign that the nearly decadelong era of low borrowing costs is coming to an end as the economy gains steam. Many Americans will start feeling an additional pinch from rising 10 year yields. That rise will make it more expensive to finance things like home purchases or kitchen makeovers with mortgages and home-equity loans that carry fixed rates. This driven rate could also result in market turbulence, putting a dent in the 401(k) retirement savings accounts of millions of workers who own stocks and bonds.
Short term interest rate hikes from the Fed have more direct impact for borrowing on credit cards, adjustable-rate mortgages and home equity lines of credit. Just last week the Fed boosted its key rate to a range of 2 percent to 2.25 percent. Continuing its push that began in December 2015 to get rates back to more normal levels after cutting them to zero percent during the 2008 financial
crisis. So the rise in the 10-year note, which boosts rates on fixed rate mortgages, acts as a double dose of doom.
Here’s how the rising yield on the 10-year Treasury could affect financial products:
Costlier fixed-rate mortgages
If 10-year Treasury yield goes up, so does the rate on fixed—rate mortgages, such as the common 30—year product. That means the biggest hit will be felt by people looking to buy a new home or condo, as the cost of financing the purchase will increase as rates rise.
As mortgage rates go up, it impacts buyer affordability – when you are shopping for a home, how much you can afford to buy is going to be tied to the current level of rates and what size mortgage you can afford.
The average 30—year fixed-rate mortgage was 4.96% in the week ending Sept. 28, according to the Mortgage Bankers Association. That’s up from roughly 4%a year ago and within the 5% level, which was last seen in February 2011. The monthly cost on a $200,000 mortgage at a 5 percent rate is roughly $1,074. That is up from the nearly $955 it cost each month for the same—size mortgage at 4% a year ago.
Retirement Savings will also be affected
Retirement savers could also take a hit due to increased turbulence in their stock and bond portfolios caused by rising rates. Higher borrowing costs could cause stock prices to fall amid fears that more debt will eventually slow down the economy which makes it more expensive for companies to borrow to grow their business. This also impacts stocks by making them less attractive when compared to higher-yielding bonds.
Bond Investors could see higher returns
Some bond investors could also suffer. The prices of the bonds they own will fall as their yields rise (prices move in the opposite direction of yields). But there’s hope for investors searching for fixed income investments with larger yields.
For example, you’re looking for income without taking on a lot of risk, you’ll get higher returns in new investments on the 10-year Treasury note. Yields that are approaching 3.25% are far more attractive than the 2.4% at the beginning of the year. A $10,000 investment at 3.25% will equal $325 annual interest compared to 2.4% and $240 annual interest.
Bond investors could start to see more meaningful returns on those positions given higher yields.