Last week former Federal Reserve Chairman Alan Greenspan warned markets that rising bond yields are a “canary in the mine” signaling a rise in interest rates. Economists fear that losses in the bond market over the last week are the beginning of a more widespread increase in rates. In short, the bond market could drive interest rates and mortgage rates higher.
Greenspan continued: “I’m very much concerned about the fiscal situation”. “[Rising interest rates] will make the housing recovery very difficult to implement and put a dampening on capital investment as well”. The massive federal deficit ($1.4 trillion in 2009) is driving record sales of treasury bonds. Treasuries fell after three note auctions last week.
The yield on ten-year notes, generally considered a bellwether for interest rates, hit a high of 3.92% last week, as recently as February the yield was 3.53%. Consensus forecasts call for yields to rise as high as 4.2% this year, the highest yield since 2008. Rising bond yields are also anticipated for Germany, Canada, Japan, the United Kingdom, and most other large economies.
James Caron, head of U.S. interest-rate strategy at Morgan Stanley was quoted in a Bloomberg story this morning as saying “The rally in Treasuries is over”. Morgan Stanley predicts that Treasury yields will rise to 5.5% by the end of the year.
While most believe market factors will cause interest rates to rise, there are some contrarians, notably analysts at Goldman Sachs, who predict that yields on 10-Year Treasuries will fall to 3.25% by the end of 2010.
Average mortgage rates for 30-year fixed rate mortgages rose to 4.99% last week, the highest rates in a month. Last week mortgage rates saw significant volatility.
In their most recent meeting, the Federal Reserve reaffirmed its pledge to keep interest rates “exceptionally low…for an extended period”. However, it appears that market factors may cause rates to rise regardless.
Do you think the bond market will cause interest rates to increase? Join the discussion below and let us know what you think.
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