July 16, 2022
  • July 16, 2022

How will a surge affect your finances?

By on March 9, 2021 0

Higher bond yields have arrived.

The 10-year Treasury yield, which is closely tied to 30-year mortgage rates and other consumer loans, surpassed 1.5% on Thursday – its highest level in more than a year. Although it relaxed its multi-week climb on Friday to 1.42%.

So what?

Well, those rising rates mean that investors need to consider changes, if any, to their stock market investments, which they typically leverage through plans like 401 (k) s. They also need to think about the potential effects of higher returns on their mortgages and auto loans.

What drives higher returns? As the United States continues to emerge from its pandemic-induced recession, optimism has grown that new stimulus aids and widespread COVID vaccinations will help the economy grow rapidly later this year. year.

Thus, rising bond yields generally indicate that investors are hoping for increased economic growth in the future.

But they can also indicate that a potential inflation spike is imminent.

Selling bonds this week has prompted investors to shy away from tech companies, which thrived in a home economy, and instead opt for companies ready to benefit from the end of lockdowns.

US stocks swirled again on Friday. On Thursday, the Dow Jones Industrial Average fell 560 points after hitting a record high the day before. The S&P 500 fell 2.5%, its worst day in nearly a month after hitting an all-time high on February 12. The Nasdaq Composite, which is heavily biased towards tech companies, lost 3.5% – its worst day since October.

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Should you fear higher returns?

Some investors fear that a rise in bond yields and long-term interest rates will end the streak of steady market gains. Remember, stocks rebounded to all-time highs after a historic drop last spring. These gains could be threatened because higher yields make borrowing more expensive, which tends to slow economic growth, which could be bad for stocks.

To be sure, inflation gains over the past year have been modest. The economic disruptions caused by the pandemic continued to suppress demand and kept inflation at extremely low levels. This helped the Federal Reserve to keep interest rates at historically low levels in an effort to help pull the economy out of recession.

Even before the pandemic, inflation over the past decade has remained subdued, with annual price increases remaining well below the Fed’s 2% target.

If rates rise because the outlook for economic growth improves, rising interest rates should not pose a risk to the stock market, experts say.

“Unless there is a sustained surge in inflation, rising bond yields will have a minor impact on stocks,” said Richard Saperstein, chief investment officer at Treasury Partners, a registered investment advisor, in a note. “Bond yields are rising right now because the market is factoring in reopening the economy to the post COVID-19 world and accelerating economic growth.”

Just as important as how quickly bond yields rise may be just as important as the extent to which, experts say. Here’s how the changes could affect consumers:

How will higher returns affect stocks?

Equity investors shouldn’t be too concerned about the recent surge in yields, according to David Lefkowitz, head of Americas equities at UBS Financial Services. This is because there is growing optimism about economic growth and rates are finally “catching up” to the bullish growth prospects of the stock market, he added.

Over the past three months, the yield on 10-year Treasuries has risen by more than half a percentage point, a rapid trend above 90% in all three-month periods since 1990, according to UBS Financial Services .

Still, stocks generally perform quite well during these times. On average, the S&P 500 gains 3.9% (16.5% annualized) when interest rates rise more than half a percentage point, according to data from UBS Financial Services. While yields tend to be a bit lower in the three months after a big rate move – 2.5% on average – they’re no worse than a typical three-month period.

Rising yields have implications for the stock market and may make stocks of higher valuation companies less attractive. These types of stocks tend to be tech companies, which are usually priced on growth and not on a steady return of dividends like consumer staples, utilities, and real estate companies.

Rising rates tend to be good for more cyclical sectors, or for companies whose businesses and stock prices tend to follow the economic cycle. These include sectors like consumer discretionary, energy, finance, industrials and healthcare.

Bank stocks, which suffered from lower interest rates last year, would post higher profits if interest rates continued to rise. And while the tech sector would risk falling if yields rose due to higher inflation, the increased free cash flow and recurring revenue streams of the industry would offer protection, Saperstein said.

Investors are looking to corners of the market that would benefit from the reopening of the economy. For the week, the energy and financials sectors of the S&P 500 were up 5% and 0.5% respectively. Meanwhile, tech was down 3% for the week. Apple, Amazon, Facebook and Microsoft, the companies that propelled the stock market higher in 2020, were all slightly higher on Friday after each falling at least 2% on Thursday.

When is rising yields a problem?

Can long-term yields and rates rise too much before they start to become a risk for stocks? In theory, yes, but usually only if a rate hike begins to stifle economic growth.

Rising yields will likely inject more volatility into financial markets as investors debate when the Fed will be forced to tighten monetary policy, although it doesn’t look like it anytime soon.

Fed Chairman Jerome Powell downplayed concerns this week over potentially higher inflation and signaled that the central bank sees no need to change its ultra-low rate policies in the foreseeable future. The Fed predicts that inflation will stay at or below the central bank’s 2% target until 2023.

Despite conventional thinking that rising long-term rates are bad for stocks, historical data shows that the broad S&P 500 has actually posted strong returns.

The S&P 500 averages an annualized total return of 13% and has risen 81% of the time during periods of rising rates (13 out of 16), according to data from Truist Advisory Services.

“With the pandemic ending later this year, pent-up consumer demand, more fiscal stimulus on the way … it’s hard to see the recent rate hike having a significant drag on economic growth,” Lefkowitz said in a note.

Will this affect mortgage rates?

A number of consumer loans are influenced by levels in the US bond market, particularly mortgage rates.

Rising interest rates mean more expensive mortgages, reducing affordability for potential buyers. And if fewer people can afford a home, it could also cause real estate prices to stagnate or even fall, which would reduce the build-up of current homeowners’ equity, analysts said.

Mortgage rates have risen in six of the past eight weeks, with the 30-year benchmark fixed rate last week climbing above 3% to its highest level since September, according to the Mortgage Bankers Association. As a result of these higher rates, overall refinancing activity fell 11% to its lowest level since December, but remained 50% higher than a year earlier.

However, mortgage rates are expected to remain historically low and should support a slight increase in the pace of sales for the full year, according to Oxford Economics.

“Homeowners can take advantage of the low interest rate environment by refinancing the mortgage, generating hundreds of dollars in savings each month and tens of thousands of dollars in savings over the life of the loan,” said Greg McBride, chief financial analyst at Bankrate. a note.

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