How the rising Treasury rate can hurt you

Closely-watched benchmark tops 3% for the first time in four years. Here’s why that matters

USA TODAY

Little by little, the era of recordlow borrowing costs is fading, which means Americans will pay more for home mortgages, loans and other forms of credit.

On Tuesday, the 10-year Treasury yield ticked above 3% for the first time since January 2014, according to Tradeweb. The closely-watched benchmark affects borrowing costs for businesses and shoppers and is the latest sign that interest rates are moving up after remaining depressed for nearly a decade following the financial crisis.

The 10-year U.S. government bond’s rise comes as the Federal Reserve, which hiked shortterm rates last month for the sixth time since December 2015, continues to raise its key rate to get back to historically normal levels after cutting them to 0% in late 2008.

The nation’s central bank is increasing rates in response to a stronger economy, higher inflation and an unemployment rate at its lowest level in 18 years.

The transition from lower to higher rates, is something Main Street Americans need to pay attention to, as it can crimp people’s cash flow and make their monthly bills larger.

Higher rates also have the potential to affect peoples’ investments. Stocks, for example, could fall despite a strong economy because investors fret that higher costs of borrowing for shoppers and businesses could trigger a slowdown in growth. The Dow Jones industrial average closed 425 points, or 1.7%, lower Tuesday, due in part to rising rate fears and a warning from heavyequipment maker Caterpillar that suggested that its strong first quarter earnings would likely not be repeated in future quarters.

Wall Street expects rates to continue to move higher.

The market expects two more rate hikes from the nation’s central bank this year, which will affect credit cards, home-equity lines of credit and adjustable-rate mortgages.

Capital Economics expects the 10-year Treasury yield to end 2018 higher at 3.5%.

Here’s how a jump above the 3% level on the 10-year U.S. government bond could affect your money:

Mortgages get more expensive

Buying a home often is the biggest investment an American family makes. And as interest rates on mortgages rise, the less affordable a dream home becomes.

The rates on 30-year fixed-rate mortgages and on refinancing loans rise in “close concert” with 10-year Treasury yields, notes Greg McBride, chief financial analyst at Bankrate.com.

Still, the rate of 4.66% on a conforming 30-year-fixed mortgage is still not near a level that would put a house out of reach.

“With mortgage rates still well below 5%, an increase may mean you buy a less expensive house, but it doesn’t price anyone out of the market unless they were pretty close to the edge to begin with,” McBride says.

With buyer confidence high now, home buyers will still be willing to close a deal no matter if mortgages are 4.5% or 5.5%, he says.

Still, the recent rise in rates already has caused refinancing activity to dry up as most people’s existing mortgages are below current market rates, says Mike Fratantoni, chief economist at the Mortgage Bankers Association.

Stocks could suffer

Higher rates also pose a threat to stocks if they cause the economy and corporate profits to slow. Higher borrowing costs make it more expensive for companies to expand, which could crimp growth.

If bonds seem more appealing, that shift in mind-set could “potentially siphon off money that otherwise would have made its way into stocks,” McBride says.

Stocks would suffer the most if rates spiked to 3.5% faster than expected, says Joe Quinlan, chief market strategist at U.S. Trust.

Bond investments may take hit

As rates rise, the value of bonds falls, which could lead to losses for unsuspecting investors.

An index of U.S. Treasuries, for example, fell 3.4% in a five-month period ending Feb. 15, a span in which the yield on the 10-year Treasury rose by nearly 1%, according to an analysis by LPL Financial.

The transition from lower to higher rates can crimp people’s cash flow and make their monthly bills larger.

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