So-called cheap money is getting more expensive on Wall Street, and that could spell trouble for investors, home buyers and dealmakers.
In the latest sign that borrowing costs are on the rise, the yield on the benchmark 10-year Treasury note spiked to 5.13 percent, its first close above the psychologically important 5 percent level since July 2006.
The breakout in long-term government bond yields could be signaling that the era of rock-bottom interest rates, which has helped fuel a sharp rise in asset prices around the globe, may be nearing an end.
“It feels like people woke up and said, ‘Holy cow yields are moving up,’” says Bill Hornbarger, chief bond strategist at A.G. Edwards.
This week, central banks in New Zealand and Europe raised key interest rates to curb growth and inflation. At the same time, hopes for a rate cut in the United States dimmed. Similarly, the outlook for the Treasury market has taken on a more pessimistic tone.
Even long-time bond bull, Bill Gross of Pimco, has turned bearish on Treasuries after concluding that strong economic growth around the world and a mild uptick in inflation is likely to continue for years. In an interview posted on the firm’s Web site, he said the yield on the 10-year note could rise as high as 6.5 percent in the next three to five years – a full percentage point above last year’s long-term projection.
The growing realization that borrowing costs are on the rise is already causing financial reverberations.
• Stock prices have taken a hit. In a three-day span, the Dow Jones industrial average fell 410 points to 13,267, dropping it 2.9 percent below its all-time high and trimming its year-to-date gain to 6.4 percent. The biggest losers have been rate-sensitive stocks, such as banks, homebuilders and utilities, whose profits take a hit when borrowing costs rise. “As yields rise, bonds provide more competition for stocks,” says Buffalo wealth manager Tony Ogorek.
• Mortgage rates are rising. Fixed-rate home loans are pegged to the 10-year Treasury note. The average 30-year fixed-rate mortgage is up to 6.53 percent, its highest level since August 2006, according to a Freddie Mac mortgage survey.
