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Re-thinking the boring bond

Tracey Samuelson May 12, 2015
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The usually boring bond market has been distinctly un-boring of late. What began in German bonds a couple of weeks ago has arrived at the U.S. Treasury market.

German rates have climbed about half a percent, “which is a big move in bond world,” says Brian Rehling, co-head of global fixed income strategy at the Wells Fargo Investment Institute. “That’s really what’s moved U.S. rates higher.”

The yield on the 10-year Treasury on Tuesday climbed to its highest level since late November before settling back down slightly, to 2.26 percent.

Rate increases aren’t limited to the bond market, says Guy LeBas, chief fixed income strategist at Janney Montgomery Scott. Consider a bank which might buy a bond or make a mortgage loan.

“If the returns [banks] get on bonds are higher, because interest rates have risen, they’re going to require a higher interest rate on that same mortgage loan,” LeBas says.

“We could list a whole conga line of ramifications,” says Marilyn Cohen, president of Envision Capital Management.

In addition to mortgage rates, she says “car loans are less sensitive than mortgage rates, but certainly will drift up, and any type of consumer loans or line of credit that you may have that you’re thinking about using a portion of, those rates would go up.”

Cohen says she doesn’t think we’ll see a big rate increases, but many  parts of the economy are counting on low interest rates. On the flip side, higher interest rates mean it’s a decent time to buy bonds – they’ll offer more income now.  

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