Why long-term rates have gone flat -- again
March 20, 2014
When long-term interest rates reversed course dramatically last year and started rising, it was natural to think it was just the beginning of a long-term trend. Now, that rise is starting to look more like a one-time shift to a new reality.
That could be good news for the housing market, but not such good news for savings accounts.
A rise and a rest
The bond market is a good barometer for changes in the interest rate environment, because freely traded securities can adjust to new developments almost immediately.
From mid-April to mid-August of last year, 10-year bond yields rose by about a full percentage point, reaching 2.73 percent by August 16. It looked like the beginning of a trend, but as of March 14 of this year, those bond yields were at virtually the same level. Thirty-year mortgage rates have followed a similar trajectory, rising sharply from early May to early July, and then essentially leveling off since.
A time to wait and see
Why did these steep climbs in rates suddenly stall? It seems as though the market has gone into a wait-and-see mode, for a number of reasons:
- The economy appeared to lose momentum late in 2013.
- A harsh winter made it unclear to what extent the economy's sluggishness was merely seasonal.
- With the Fed tapering its quantitative easing in baby steps, the impact is still unknown.
- The Ukrainian situation threw a new wild card into the mix.
A big reason interest rates are in no hurry to go anywhere is that inflation has remained firmly in check. On March 18, the Bureau of Labor Statistics reported that the Consumer Price Index rose by just 0.1 percent during February. That is consistent with the low level of inflation over the past year, at just 1.1 percent.
Even with current mortgage rates at just above 4 percent, mortgage lenders still have room to profit if inflation is going to be down around 1 percent. While up from a year ago, today's mortgage rates are still extremely attractive compared to their historical levels.
Keeping a lid on short rates
Long rates were the first to rise because by nature, as they have to anticipate the long-term. Short-term rates, which include rates on savings accounts, money market accounts and most certificates of deposit, are able to adjust frequently, and thus can afford to react rather than anticipate.
This is why rates on savings accounts have stayed anchored near zero. Until either stronger growth or rising inflation become evident, savings account rates will have no reason to go anywhere. Fed policy only reinforces this heavier weight on short-term rates. The Fed has clearly signaled that it plans to allow long-term rates to rise before adjusting its policy toward short-term rates.
This means now is actually a good time to shop for short-term rates. If the market is not moving, the only way to get a better rate is to do it yourself.