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Rate hike fears drop markets

Amy Scott Jun 8, 2007
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Rate hike fears drop markets

Amy Scott Jun 8, 2007
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TEXT OF STORY

SCOTT JAGOW: It’s not just the stock market. Investors sold a lot of bonds yesterday and their prices tumbled. That sent the yield on the 10-year T-note above 5 percent for the first time in almost a year. And there really is good reason to care about bond prices. Amy Scott explains what the heck happened yesterday.


Amy Scott: Blame it on New Zealand. The country surprised investors yesterday by raising interest rates to curb inflation. The European Central Bank raised its rates Wednesday.

And Federal Reserve chairman Ben Bernanke hasn’t helped matters. He warned early this week that inflation may pose a bigger threat than previously thought.

Beth Malloy follows the bond market for research firm Briefing.com. She says investors got nervous.

Beth Malloy: You know, the Fed’s been saying that they’re worried about inflation and we’re seeing it happen all over the place. This is where the market kind of hit a wall and said “Uh-oh, maybe it’s true.”

Bond-holders don’t like inflation, because the cure is an interest-rate hike. Let’s say you bought a Treasury note at 5 percent. If the interest rate on T-notes goes up to 6 percent, the bond you bought is suddenly less attractive and its price falls.

Stock investors don’t like inflation either. Those higher interest rates make borrowing more expensive. And without access to cheap money, corporations don’t grow as fast and consumers don’t spend as much. U.S. stocks fell yesterday for the third day in a row.

But currency investor Axel Merk welcomed the sell-off. He says investors have been flooding the markets with money — often borrowed money — without appreciating the risk.

Axel Merk: We need to have a little bit of volatility in the market to instill fear to investors, so that they start making reasonable decisions again.

In fact, some people think this pullback is what central bankers want.

Investment adviser Gary Shilling says this isn’t the first time the Fed has warned about inflation.

Gary Shilling: But that may be really masking a greater concern, which is rampant speculation and a speculative blow-up that could be very, very serious.

So, a market correction may be good for the economy. But consumers could chafe if interest rates rise. Mortgage rates are pegged to the 10-year Treasury note. If Treasury yields keep rising, so will the cost of home loans.

In New York, I’m Amy Scott for Marketplace.

TEXT OF STORY

SCOTT JAGOW: It’s not just the stock market. Investors sold a lot of bonds yesterday and their prices tumbled. That sent the yield on the 10-year T-note above 5 percent for the first time in almost a year. And there really is good reason to care about bond prices. Amy Scott explains what the heck happened yesterday.


Amy Scott: Blame it on New Zealand. The country surprised investors yesterday by raising interest rates to curb inflation. The European Central Bank raised its rates Wednesday.

And Federal Reserve chairman Ben Bernanke hasn’t helped matters. He warned early this week that inflation may pose a bigger threat than previously thought.

Beth Malloy follows the bond market for research firm Briefing.com. She says investors got nervous.

Beth Malloy: You know, the Fed’s been saying that they’re worried about inflation and we’re seeing it happen all over the place. This is where the market kind of hit a wall and said “Uh-oh, maybe it’s true.”

Bond-holders don’t like inflation, because the cure is an interest-rate hike. Let’s say you bought a Treasury note at 5 percent. If the interest rate on T-notes goes up to 6 percent, the bond you bought is suddenly less attractive and its price falls.

Stock investors don’t like inflation either. Those higher interest rates make borrowing more expensive. And without access to cheap money, corporations don’t grow as fast and consumers don’t spend as much. U.S. stocks fell yesterday for the third day in a row.

But currency investor Axel Merk welcomed the sell-off. He says investors have been flooding the markets with money — often borrowed money — without appreciating the risk.

Axel Merk: We need to have a little bit of volatility in the market to instill fear to investors, so that they start making reasonable decisions again.

In fact, some people think this pullback is what central bankers want.

Investment adviser Gary Shilling says this isn’t the first time the Fed has warned about inflation.

Gary Shilling: But that may be really masking a greater concern, which is rampant speculation and a speculative blow-up that could be very, very serious.

So, a market correction may be good for the economy. But consumers could chafe if interest rates rise. Mortgage rates are pegged to the 10-year Treasury note. If Treasury yields keep rising, so will the cost of home loans.

In New York, I’m Amy Scott for Marketplace.

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