What Is Going To Happen If Interest Rates Continue To Rise Rapidly?
By Michael Snyder, on August 16th, 2013
If
you want to track how close we are to the next financial collapse,
there is one number that you need to be watching above all others. The
number that I am talking about is the yield on 10 year U.S. Treasuries,
because it affects thousands of other interest rates in our financial
system. When the yield on 10 year U.S. Treasuries goes up, that is bad
for the U.S. economy because it pushes long-term interest rates up.
When interest rates rise, it constricts the flow of credit, and a
healthy flow of credit is absolutely essential to the debt-based system
that we live in. Just imagine someone squeezing a tube that has water
flowing through it. The higher interest rates go, the more economic
activity will be squeezed. If interest rates continue to rise rapidly,
it will be more expensive for the U.S. government to borrow money, it
will be more expensive for state and local governments to borrow money,
the housing market may crash again, consumer debt will become more
expensive, junk bond investors will be in for a world of hurt, the stock
market will experience a tremendous amount of pain and there is a good
chance that we could see
the 441 trillion dollar interest rate derivatives bubble implode. And that is just for starters.
So
yes, we all need to be carefully watching the yield on 10 year U.S.
Treasuries. On Friday, it opened at 2.76% and hit a high of 2.86%
before closing at 2.83%. The yield on 10 year U.S. Treasuries is up
nearly 120 basis points since the beginning of May, and almost everyone
on Wall Street seems convinced that it is going to go much higher.
We
are truly moving into unprecedented territory, because we have been in a
bull market for U.S. Treasuries for the last 30 years. Many investors
don't even know that it is possible to lose money on U.S. Treasuries.
They have been described as "risk-free" investments, but that is far
from the truth.
In fact, we could see bond investors of all types end up losing
trillions of dollars before it is all said and done.
And
those in the stock market will lose lots of money too. Low interest
rates are good for economic activity which is good for the stock
market. The chart posted below was created by
Chartist Friend from Pittsburgh,
and it shows that stock prices have generally risen as the yield on 10
year U.S. Treasuries has steadily declined over the past 30 years...
When
interest rates rise, that is bad for economic activity and bad for
stocks. That is why so many stock analysts are alarmed that interest
rates are going up so rapidly right now.
And as I wrote about the other day, we have just witnessed
the largest cluster of Hindenburg Omens
that we have seen since before the last financial crisis. The stock
market already seems ripe for a huge "adjustment", and rising interest
rates could give it a huge extra push in a negative direction.
By the time it is all said and done, stock market investors could end up losing
trillions of dollars in the next stock market crash.
In addition, rising interest rates could easily precipitate another housing crash. As
the Wall Street Journal discussed on Friday, as the yield on 10 year U.S. Treasuries goes up it will also cause mortgage rates to rise...
Higher
yields will push up long-term borrowing cost for U.S. consumers and
businesses. Mortgage rates will rise, and investors are keeping a close
eye on whether this may derail the recovery of the housing market, which
has shown signs of turning a corner this year.
In
one of my previous articles, I included an example that shows just how powerful rising mortgage rates can be...
A
year ago, the 30 year rate was sitting at 3.66 percent. The monthly
payment on a 30 year, $300,000 mortgage at that rate would be $1374.07.
If the 30 year rate rises to 8 percent, the monthly payment on a 30 year, $300,000 mortgage at that rate would be $2201.29.
Does 8 percent sound crazy to you?
It shouldn't. 8 percent was considered to be normal back in the year 2000.
If you own a $300,000 house today, do you think it will be easier to sell it or harder to sell it if mortgage rates skyrocket?
Yes,
of course it will be much harder. In fact, there is a good chance that
you will have to reduce your selling price significantly so that
prospective buyers can afford the payments.
Let us hope that the
yield on 10 year U.S. Treasuries levels off for a while. If it says at
this current level, the damage will probably not be too bad.
But if it crosses the 3 percent mark and keeps soaring, things could get messy pretty quickly. In fact, according to a
Bank of America Merrill Lynch investor survey, the 3.5 percent mark is when the collapse of the bond market is likely to become "disorderly"...
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