Dear Readers,
It's been a while since I've written and a lot has gone on in both my life and the markets! On my end, I graduated from business school, packed up my apt in DC, and moved my whole life to New York City. I've gotten settled in well, exploring the city almost every day. I say "almost" because my job search is in full force, and looking for a job can be a full-time one, ironically. But, I'm back to blogging, so here goes!
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So much has happened in the markets over the past month, but much of it has occurred in the past week or so. You probably saw headlines to the effect of, "Markets Flinch as Fed Eyes Easy-Money End," or "Global Sell-off Shows Fed Reach Beyond the U.S."
What happened to cause all of this drama?
At a meeting of the Federal Reserve Board, Chairman Ben Bernanke basically said that he is considering ending quantitative easing (the buying up Treasury bonds by the Fed itself to keep interest rates low so people spend and invest more) later this year or at some point next year, rather than waiting until the unemployment rate was below 6.5%, as he initially promised. This implies that Bernanke feels that the U.S. economy is strengthening at a pace that it won't need to be supported by the government anymore; it's a compliment, really.
Problem is, the market did not interpret it as such.
Investors around the world freaked out, selling stocks and bonds like nobody's business, which shows that investors are not as confident in the strength of the U.S. economy as Mr. Bernanke is. It also shows that investors, businesses, and consumers alike have all gotten very used to record low interest rates. (For example, car sales have jumped exponentially over the past year.)
The trouble is, QE has to end at some point. And with that, interest rates will rise. The big sell-off in bonds last week helped them rise already. The yield on 10-year Treasuries jumped to 2.308%, its highest level since March 2012. The yield on 30-year Treasuries rose to 3.65%, a height not seen since 2011. Even more amazingly, these rates went up faster than they have since August 2009.
So, what does that mean for the average individual, even someone who is not an investor?
Treasury yields are used as a base for many interest rates, from savings accounts to car loans to mortgages. With yields being so fickle last week, mortgage rates have shot up. As of June 27, 2013, the rate on 30-year fixed mortgages were 4.46%, the highest since August 2011. BUT, last week, said rate was just 3.93%.
This is really significant because, of course, the interest rate has a massive effect on the size of a mortgage payment. Think of it this way (courtesy of CBS News):
"A $165,000 30-year loan obtained with last week's 3.93 rate will cost $786 per month. Under the new 4.46 percent rate, that jumps to $832 per month. That's a $46 monthly increase -- or a whopping $16,560 over the life of the loan. ...For a $300,000 30-year loan, the rate increase comes to an extra $92 per month, or $33,120 extra over the life of the loan..."
YOWZA!
Unfortunately, there's not much that individual home (or car or appliance) buyers can do. Never try to time the market, of course. Just wish for the best and refinance as appropriate, although the odds of rates doing down from where they are now are extremely slim, in my opinion.
