How high can interest rates go? As Jackie Gleason might say,
"Straight to the moon, Alice!"
For sure, the housing market is already feeling the pain of
higher interest rates and the affordability of homes, especially
new homes (NYSEARCA:ITB) is being pushed to its outer limits. (See
The One Housing Indicator You Shouldn't
Mortgage applications (NYSEARCA:MBB) for new homes have fallen 15%
while mortgage refinancing have plunged 63% since May. Also, the
average rate for a 30-year fixed-rate mortgage is up almost
A slowdown in the housing market is especially problematic
because the broader U.S. economy has leaned so heavily on housing
During the first quarter of 2013, residential investment
contributed almost one-third of a percentage point (0.31%) to GDP.
If a rebounding housing market has boosted economic activity and
GDP that much, what will a souring housing market portend?
How do Stock Valuations Compare today vs. the Dot
A Trillion Dollar Headache
Higher interest rates and excessive debt is always recipe for
disaster. And the student loan marketplace is ripe for mayhem.
Currently, there's over $1 trillion in outstanding student
loans, which after mortgages, is the next largest source of
household debt. By comparison, student loans were just $240 billion
a decade ago.
In a clear sign of trouble ahead, JPMorgan Chase (
) is pulling out of the student loan business in October, according
Surging interest rates will increase student loan defaults
and already $8 billion of private student loans have defaulted,
according to the Consumer Finance Protection Bureau.
Perspective on Rates
The chart below gives us some historical point of reference about
interest rates. It shows the yield spread (or difference) between
10-year Treasury yields (NYSEARCA:IEF) and the Federal Funds Rate (
You'll notice how the yield spread between both benchmarks has
never been more than 400 basis points or 4%. And today, with
10-year yields now around 2.90% and the FFR between zero and 0.25%,
the 10-year yield would need to shoot up to 4.25% to break
historical records. That leaves a potential 1.35%upside in 10-year
yields, should the FFR hold steady and should rate relationships
stay within their historical limits.
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