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The cost of borrowing money is on the rise. This is bad news for homebuyers and other potential borrowers. This contributed to a sell-off in the stock market on Wednesday and led President Trump to say that the Federal Reserve had "gone crazy".
But this is good news for the long-term direction of the economy.
Indeed, the multi-billion dollar global bond market augurs a little more confidence than it was just a few weeks ago that the nine years of expansion in the United States could continue for many years without inflation taking over.
The 10-year US Treasury yield reached its highest level in seven years this week, at 3.25%. (He pulled back from Wednesday as stocks fell), up 2.82% in August. The 10-year rate was below 1.4% in July 2016.
But beyond these figures, the way in which the prices of different types of securities have evolved compared to others tells a decidedly optimistic story.
In recent years, short-term interest rates, which the Fed controls directly, have risen much faster than long-term rates, which are based on global bond supply and demand. The Fed was planning rate hikes while investors were clearly skeptical about the persistence of sufficient growth to justify higher rates in the long run.
At the end of August, the 10-year government bond rate was 0.18% higher than the two-year government bond rate, a phenomenon known as the yield curve at the end of August. dish. (When this number becomes negative, it is considered a ""Inverse yield curve" and is often a measure of the impending recession.)
Since then, long-term rates have risen faster than those in the short term. While the yield curve remains stable by historical standards (the gap between 10-year bonds and two-year bonds has risen by only 0.33% in recent days), it has evolved in recent years. a direction compatible with a more optimistic perspective.
"The long end of the yield curve has finally evolved to suggest that the recovery may be more persistent," said Michelle Meyer, director of the US economy at Bank of America-Merrill Lynch. "This reflects the possibility that this recovery still has legs."
Most importantly, the rise in long-term interest rates does not seem to be driven by expectations of higher inflation.
Inflation-protected bond yields have generally moved in tandem with traditional bonds in recent weeks, suggesting that traders are not more worried about inflation.
For example, the current price differential between the two types of bonds, which has increased only very little since August and is below its May level, suggests inflation of 2.16% per annum over the next decade.
The rise in long-term interest rates stems mainly not from rising inflation expectations, but rather from investor expectations of what the Fed will do. and for how much do investors in clearing obligations require in terms of loans over long periods.
In previous years, financial markets had doubts that the Fed would follow through on its rate hike. Now, the Fed's own forecasts are in line with the rise in tariffs on the markets.
"The market seems to have accepted the Fed's interest rate path," said Megan Greene, chief economist at Manulife Asset Management.
In addition, Roberto Perli of Cornerstone Macro estimates that a large portion of the highest rates corresponds to an increase in the "term premium". This means that investors are demanding more compensation than a few weeks ago for locking in their money for many years. This means that they now see a greater probability than growth and short-term interest rates may surprise by increasing faster than forecasters expect.
"The markets are raising their expectations for growth and have raised them all year," said Perli. "The trend is clearly on the rise, and the market is betting that it will continue."
Add all this, and that means the worldt savvy investorWe expect that the US economy will continue to grow at a healthy pace, without inflation, but that the Fed will have to continue raising rates well above current levels to prevent this inflation.
Of course, the higher rates have disadvantages. The recent stock market volatility has been partly fueled by the realization that higher rates will result in higher borrowing costs for companies.
And the housing sector is particularly sensitive to long-term interest rates on the bond market, which in turn determine mortgage rates. Housing has already shown weakness in some markets These last months.
The average rate of a 30-year fixed rate mortgage rose from less than 4% at the end of 2017 to 4.7% last week, according to data from Freddie Mac.
"We are entering this area where the typical mortgage payment is growing much faster than revenue, which will dampen some markets," said Aaron Terrazas, chief economist of Zillow Real Estate.
Indeed, higher mortgage rates may affect home appreciation rates because buyers can not bid as aggressively as when they are downgraded.
And markets, even deep and liquid like the bond market, are not always right and are often wrong. No one will say that the details of the yield curve, for example, offer an unmistakable prediction of the future.
But despite all the volatility and risks inherent in some interest rate-sensitive industries, the message from the recent interest rate hike is unequivocal: it is possible that this expansion may still have some life.
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