Interest Rates on the Move:UP

by Laura Ehrenberg-Chesler on December 9, 2010

in Bonds,Economic Indicators,Fixed Income,Foreign Markets,Investment Strategies

Interest rates around the world are on the move,  and the direction is up.  The ten year U.S. Treasury bond is currently yielding 3.22%, after falling to a historic low earlier this year.  And, the 30 year fixed mortgage rate has risen to 4.61%, well above the 4.17% just one month ago.

This upward move has several implications for both the equity and fixed income markets.  As interest rates climb, the prices of bonds goes lower.  Many investors are becoming aware of this relationship, and its associated volatility, prompting them to exit their bond funds, and some individual bond holdings, particularly the ones that are longer dated.  Other interest rate sensitive holdings, such as utilities or preferred stocks, may also come under some pressure in the future, though the likelihood of that happening in the near term is less concerning.

What rising rates do mean for the stock market however, is something potentially more positive.  One reason is the money exiting bond funds needs to find a home.  Another may be that with an improving economy, the natural direction for rates will be higher.

While the current move in rates may be a bit too far, too fast, the concept of higher rates over the next 12 months should be contemplated by all.

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