Interest Rates Soar to Highest Levels Since Early 1986
NEW YORK (AP) _ Interest rates soared in the bond markets again Wednesday, extending a surge that has rocketed rates to levels not seen since early 1986 and signaling higher credit costs for consumers, businesses and government.
The shock waves from the rate jump extended to the stock market, where the widely followed Dow Jones industrial average has dropped just over 60 points in two sessions.
Analysts largely blame the weakening dollar for the interest rate surge and say widespread sentiment that the currency must fall further to improve the nation’s poor trade performance is souring the mood in the credit markets.
Experts also said the recent rate gains were the most glaring signs of a year-long trend that will mean further increases in a variety of lending rates, including mortgage interest, the base lending rates charged by banks and interest on variable-rate credit cards.
″I don’t think this is temporary,″ said Sung Won Sohn, chief economist at Norwest Corp., a Minneapolis-based bank holding company. ″Some people may think this is a break in the bull market (for bonds), but I certainly think we’re in a bear market.″
Interest rates generally have moved higher much of the year on signs of stronger economic growth, which increases demand for credit and thus interest rates, and of higher inflation.
But the recent slump in the dollar has triggered the sharpest rate jumps since late spring, when inflationary fears led to a weakening dollar that ignited a surge in interest rates.
Prices of some 30-year Treasury bonds, considered the most sensitive to interest rate speculation, tumbled by more than $15 per $1,000 in face value on Wednesday, following Tuesday’s declines of about $11.25.
The yield on the bonds, which moves inversely to price, rose to more than 9.4 percent late Wednesday from 9.27 percent late Tuesday and 9.16 percent late Monday. The yield was about a half-point higher than in mid-August and more than two points higher than in January, when the 30-year bond yielded an average 7.39 percent during the month.
″I think we’re experiencing a panic selling situation today that may take a while to run its course, then you may see a reversal,″ said Marshall Front, an executive vice president of the securities firm Stein Roe & Farnham in Chicago. ″But for the moment at least, there’s panic in the streets, and the market is in a freefall.″
The root of the fear has been the dollar, which has slid since the government announced last month that the United States had a bigger than expected trade deficit in June - a record $15.7 billion shortfall. The dollar bought 140.85 Japanese yen late Wednesday in New York, down 7.3 percent from 152 yen on Aug. 14.
A weak dollar, which makes U.S. products cheaper overseas and raises the cost of imports, was the key tool in the Reagan administration’s attempts to shrink the trade deficit. Failure of the strategy to yield results has raised speculation that the government will seek further declines in the dollar.
But the markets and the Federal Reserve believe too weak a dollar could ignite high inflation, which diminishes the value of fixed-income investments such as bonds while discouraging foreign investment, which has been a key source of financing for the huge U.S. budget deficit.
That worry has sparked a selloff of bonds in speculation of further declines in the dollar and weakening foreign demand for U.S. bonds in the coming months.
When the dollar plunged earlier this year the Fed tightened credit slightly, pushing interest rates higher to help attract dollar buyers and stem the currency’s decline.
Many analysts believe the Fed will take similar steps this time, which will raise short-term interest rates. That in turn is likely to prompt banks to raise their prime lending rate, currently 8.25 percent, which is based on how much banks must pay for short-term credit.
The rise in long-term rates already is working its way into home mortgages. Because many mortgage loans are traded like government and corporate bonds, mortgage rates in recent years have become increasingly tied to the bond market.
Fixed-rate mortgages averaged 10.33 percent at the end of last week, up from 10.3 percent the previous week and a low of 9.1 percent in late March, according to a weekly survey by the Federal Home Loan Mortgage Corp.
Economists said the impact of the market’s slump on mortgages will be more noticeable in the next several days, as lenders adjust their rates to account for the latest surge.
The effect on the housing market could be substantial if sustained. The spring rate surge, which saw fixed-rate mortgages peak at about 10.8 percent in May, coincided with a 12.3 percent drop in new home sales that month.
″The potential is not that bond rates will just jump up, but that they will continue to rise over a longer period of time. That’s going to be a real problem for housing,″ said John Tuccillo, chief economist for the Washington- based National Association of Realtors.