Wednesday, July 03, 2013

Investment update: Interest rates rise, driving up mortgage rates…and bond yields

Markets continue to react to Federal Reserve Chairman Ben Bernanke’s comments last week, in which he said that the Fed could start reining in its stimulus policies if the economy continues its slow improvement. As 10-year Treasury bond yields rose to a two-year high, mortgage rates surged—also reaching their highest level in two years, and threatening to slow down the housing market’s recovery. 30-year fixed mortgage rates have risen almost a full percentage point since their record low this winter. 

Mortgage buyer Freddie Mac said last Thursday that the average rate on the 30-year fixed loan jumped to 4.46%, the highest level since June 2011 and the largest weekly increase since April 1987. That's up from 3.93% from the previous week

The average rate on the 15-year mortgage jumped to 3.50% from 3.04%. That's the highest since August 2011. A year ago, the rate on the 15-year mortgage was at 2.94%. 

Not only is this unwelcome news for homebuilders, home buyers, and those looking to refinance, these higher rates will also increase costs for public projects such as bridges and roads. 

We have been expecting that interest rates will rise eventually, which is why we have emphasized bonds with shorter maturities in our LifeStyle Income Bond (LIB) accounts. Bonds with shorter maturities have the benefit of flexibility—if interest rates continue to rise, we can reinvest in bonds with higher yields. We have also hedged against rising interest rates by investing in funds focused on floating rate loans, which increase their interest payments as rates rise. 

Experts differ on what rising interest rates will mean for the broader economy. We will continue to monitor the situation and keep you updated!

From Bob Smrekar, AIF®