Investors flee stocks, bonds after getting the lowdown from Bernanke
WASHINGTON — All it took was speculation that the Federal Reserve could slow its bond buying months from now — and then a few words on Wednesday from Chairman Ben Bernanke to confirm it.
The result is that record-low interest rates that have fueled economic growth, cheered the stock market and shrunk mortgage rates but punished savers are headed up.
Suddenly, long-term borrowing rates, though still historically low, are rising. And once the Fed starts scaling back its bond purchases, those trends could accelerate.
It means home loans are starting to cost more. Corporations will pay more to borrow. Bond investors are being squeezed. The stock market is plunging.
The yield on the 10-year Treasury note, a benchmark for long-term mortgage rates and other loans, hit 2.43 percent Thursday. As recently, as May 3, it was 1.63 percent.
For now, mortgage rates remain extremely low by historical standards. Economists say rates might not rise much further unless the economy strengthens significantly.
And the fact that Bernanke and the Fed think the economy is healthier represents a critical dose of confidence. Slightly higher rates may spook stock and bond traders. But in the long run, a robust economy should sustain the housing rebound, support job growth and encourage businesses to borrow, even at somewhat higher rates.
More economic growth should ultimately boost stock prices, too. Long-term investors saving for retirement, college educations and other major costs stand to benefit.
The Fed's $85 billion-a-month in bond purchases have helped keep long-term rates down. Bernanke said he expects the Fed to stop buying bonds altogether by the middle of 2014 if it feels the economy can manage without that stimulus. He stressed, though, that if the economy weakens, the Fed won't hesitate to step up its bond purchases again.
Here's how higher rates will affect consumers, businesses, investors and other players.
The main impact on consumers will be higher mortgage rates, economists said. Rates on auto loans, student loans and credit cards probably won't change much soon. They're more closely tied to the short-term rate the Fed controls. That rate isn't expected to rise before 2015.
The average rate on a 30-year mortgage jumped from a record low of 3.31 percent in November to 3.98 percent last week, according to mortgage giant Freddie Mac. That's the highest level in more than a year.
Higher interest rates generally benefit those with much of their money in savings. They can earn more on bond investments, CDs and savings accounts.
But savers aren't likely to see much benefit anytime soon. Banks have a lot of deposits and don't need to ramp up the rates they offer on CDs or bank accounts to attract more cash, said Greg McBride, senior financial analyst at Bankrate.com.
“They're having trouble lending out the deposits they have,” he said.
• Bond investors.
Ordinary investors who have soured on stocks have poured about $1 trillion into bond funds since the Great Recession. A common assumption is that bonds aren't very risky. These investors might be having second thoughts.
That's because as rates rise, bond investors can lose principal as the value of their existing bonds declines. Investors in bond funds, especially those with long-term holdings, are most at risk. The Pimco Total Return fund, the world's largest mutual fund with $285 billion in assets, has lost 3.3 percent in the past month.
• Small businesses.
Higher rates may further depress loan demand at many small businesses, at least for the short term.
But higher rates can also benefit small business because they signal that the economy is strengthening. When companies start making more money because they have more customers, they're more inclined to expand or buy equipment even though financing is costlier.