Interest Rates Only High If Compared With Six Months Ago

Call me a skeptic when it comes to getting really nervous about rising interest rates. “All of this debt we are selling is really having a severe impact on interest rates,” they say. It is true that interest rates on 10-year government bonds have doubled from 2% to 4% in recent months. However, not looking more than six or twelve months back does not give a very clear picture. Below is a decade-long chart of the yield on the benchmark 10-year treasury bond:

See why I am not buying the whole “higher interest rates will kill the economic recovery” argument? Yields between 4% and 6% were pretty common before the recession began and they existed with solid economic growth and less government debt. Even if yields rise further, to the 5%-6% range, it won’t be the end of the world. In fact, it might actually be nice for consumers. We finally have a positive savings rate in the U.S. and it would be good to get bank certificates of deposit to yield 5% again so those dollars being saved could earn solid interest.

Of course, many will argue that if mortgage rates reach 6%-7% the housing market will never recover because people will no longer be able to afford to buy a house. Consider these numbers, though. The monthly payment on a $200,000 mortgage at 5.5% (today’s rate) is $1,136, compared with $1,331 at a 7% mortgage rate. If you are earning ~$5,000 per month (about what you should make to buy a $200,000 house) another $200 per month (before the interest tax deduction, mind you) really should not be the difference between renting and buying for most people. Mortgage rates would have to go up a lot more to cripple the housing market, in my view.

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One Thought on “Interest Rates Only High If Compared With Six Months Ago

  1. From discussions with co-workers I get the sense that people are more worried about the debt that the government is accruing with the higher interest rates….my solution to that was simple, higher taxes. Needless to say that didnt go over too well…but thats another argument for another day.

    As for the actual yields themselves, i argued the same point that you are saying and got nowhere. I’d like to think there was a bit of historical prospective in their case but I failed to see it….more likely they were probably argueing cnbc’s talking point. I find it a bit funny how there is very little prospective involved.

    Side note: James Grant was on cnbc today(as most people probably know) and he was basically saying that the interest rate could start creeping up a little bit…mostly to fight inflation.

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