Today the Treasury market signaled a large shift in interest rates as the government auctioned off more than $19 billion in 10 year notes and they sold at a higher than expected yield of 3.99%. Just a few months ago yields for the 10 year were almost down to 3%. Since that time the Federal Reserve has started purchasing treasuries in a big way, mortgage rates had fallen to the lowest levels in decades, and a refinancing boom was evident across the country. The whole refinancing boom and the low mortgage rates are now history themselves as these higher interest rates have driven mortgage rates up to over 5.5% on a 30 year mortgage, which was about 4.5% just a short time ago.
At first when treasury yields started to climb investors and economists saw this as a very positive sign because it meant that the economy was beginning to stabilize and maybe things could start returning to economic growth. Fast forward a few weeks and now the higher treasury yields and higher mortgage rates are quite troubling to many economists and stock analysts. Why is it troubling? The recent refinancing boom has shut off and thoughts of a major housing recovery are now beginning to fade away by the day. It seems that the government is supplying a massive amount of new bonds, which in turn is pushing the yields higher and causing the concerns.
In the long run higher interest rates would be a good sign because it would indeed mean that an economic recovery has likely occurred. In the shorter time period the fact that rates are moving up so quickly could actually push back an economic recovery and leave our economy floundering around for a little bit longer than many expect. The truth is this is fairly normal occurrence on Wall Street, investors wanting some signs of a stronger economy, but wanting the signs to come at a slow pace. This is a classic case of not wanting something too cold, but also fearing that the fact it is heating up could make it too hot. Can rates find a happy medium? We will have to found out over the next few months.
