Interest Rates Expected To Rise

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The New York Times has posted an article about the end of a 30 year decline in the cost of borrowing. This is due to a combination of inflation due to the recession and the nation’s “ballooning debt.” Interest rates are currently as low as they’ll be for quite a while.

The higher interest rates will probably be noticed first in the housing market. Each raised percentage in interest rates adds 19% to the cost of a home. The rate for a 30 year fixed rate mortgage has risen half a point since December, hitting 5.31%…which is the highest it’s been since last summer.

“Mortgage rates are unlikely to go lower than they are now, and if they go higher, we’re likely to see a reversal of the gains in the housing market,” said Christopher J. Mayer, a professor of finance and economics at Columbia Business School. “It’s a really big risk.”
The Mortgage Bankers Association expects the rise to continue, with the 30-year mortgage rate going to 5.5 percent by late summer and as high as 6 percent by the end of the year.

Credit cards will also feel the rise. The national interest rate on credit cards topped out at 14.26% last week, which is the highest it’s been since 2001 and also adds $200 in interest payments alone to credit card bills. That totals to a 12.03% increase since the fourth quarter of 2008.

With losses from credit card defaults rising and with capital to back credit cards harder to come by, issuers are likely to increase rates to 16 or 17 percent by the fall, according to Dennis Moroney, a research director at the TowerGroup, a financial research company.

“The banks don’t have a lot of pricing options,” Mr. Moroney said. “They’re targeting people who carry a balance from month to month.”

Washington, too, is expecting to have to pay more to borrow the money it needs for programs. The Office of Management and Budget expects the rate on the benchmark 10-year United States Treasury note to remain close to 3.9 percent for the rest of the year, but then rise to 4.5 percent in 2011 and 5 percent in 2012.

The run-up in rates is quickening as investors steer more of their money away from bonds and as Washington unplugs the economic life support programs that kept rates low through the financial crisis. Mortgage rates and car loans are linked to the yield on long-term bonds.

Besides the inflation fears set off by the strengthening economy, Mr. Gross said he was also wary of Treasury bonds because he feared the burgeoning supply of new debt issued to finance the government’s huge budget deficits would overwhelm demand, driving interest rates higher.

Nine months ago, United States government debt accounted for half of the assets in Mr. Gross’s flagship fund, Pimco Total Return. That has shrunk to 30 percent now – the lowest ever in the fund’s 23-year history – as Mr. Gross has sold American bonds in favor of debt from Europe, particularly Germany, as well as from developing countries like Brazil.

Different firms are predicting that the rate will rise as much as half a point to one and a half points.

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