Interest Rates
June 1, 2009
Rising interest rates could create a headwind for the forthcoming economic recovery. The yield on 10-year Treasury bonds rose to a recent peak of 3.71 percent on Wednesday before receding to 3.47 percent on Friday of last week. This is up from a low of near 2 percent late last year but still below the range of 4 to 5 percent that prevailed before the recession. For bond investors, fears of a depression are receding, only to be replaced by fears of inflation. As the recovery takes hold, private demand for credit could begin to compete with the massive government borrowing necessitated by the stimulus package and the budget deficit, pushing up interest rates and sparking inflation. Having reduced the federal funds rate to zero, the Federal Reserve is trying to tamp down long-term interest rates by purchasing Treasury debt, a process called quantitative easing. The Fed already has purchased about $130 billion in long-term Treasury bonds and $480 billion in mortgage-backed securities, with plans to purchase hundreds of billions of dollars more. The recent spike in interest rates suggests that the Fed may need to step up its purchases or risk seeing the housing market recovery pushed further into the future. Commercial real estate is largely a bystander at this point because there is so little lending going on other than the extension of existing loans by banks that do not want to take back properties. However, lower interest rates and spreads certainly are preferable because they would support the return of investors to the property market.
Source: Federal Reserve