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Kathleen Madigan Archives | Email alerts
March 16, 2012, 12:01 a.m. EDT
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By Kathleen Madigan of Dow Jones Newswires
NEW YORK (MarketWatch) "” A more upbeat outlook has a price: higher interest rates.
The years of market turmoil and economic uncertainty pushed investors into the safe-harbor arms of Treasurys. High demand lifted prices and sent yields down to rock-bottom lows. Now, more confidence in the recovery, along with less concern about the euro-zone debt crisis, are easing risk aversion.
The resulting rise in interest rates gathered steam after the Federal Reserve's policy meeting Tuesday when the Fed sounded a bit more upbeat about the economy. In mid-Thursday trading, the yield on a 10-year Treasury stood at about 2.27%. That's up about 60 basis points since September, a rise that puts upward pressure on interest rates linked to the government security.
The new iPad offers fast speed and one of the most spectacular displays ever seen in a mobile device, Walt Mossberg discusses on digits. Photo: Getty Images.
Usually, higher borrowing costs are a drag on economic activity. Housing is particularly vulnerable to higher rates.
But that will not be the case this time around.
First, even with the rise, interest rates are historically low. According to the Mortgage Bankers Association, the fixed rate on a 30-year home loan is still a cheap 4.06%. Plus, business borrowers may be helped as investors turn away from Treasurys and become interested in riskier assets like corporate bonds.
Second, the Fed is not going to allow higher rates to stop a housing recovery.
"Housing is the Achilles heel of the recovery and [Fed chairman Ben] Bernanke is not about to let borrowing costs move too far against him," says Eric Green, chief rate strategist at TD Securities.
In its efforts to boost housing demand, the Fed will also get help from the improved job market and banks' greater willingness to lend.
The Fed's first-quarter survey of bank officers show some banks are easing their standards for prime mortgages as well as for auto and other consumer loans.
Another plus is the increase in the loan-to-value ratio in mortgages, says Ian Shepherdson, chief U.S. economist at High Frequency Economics. Coming up with the money for a downpayment had been a big obstacle for first-time buyers. A higher LTV ratio means banks are allowing downpayments to cover a smaller share of the sales price.
The positive trends in jobs and downpayments "will offset the impact of steadily higher rates," says Sheperdson who expects the 10-year Treasury yield to hit 3.0% by the end of 2012. But even 3% would be well below the 4.0% averaged over the last 10 years.
(This column previously appeared on Dow Jones Newswires.)
Kathleen Madigan is the primary writer of the Big Picture column for Dow Jones Newswires.
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