What are the implications of spiking global interest rates?

(Note: This article was also Featured at LinkedIn’s Pulse: Money and Banking)

For many an article about central banks, bond yields and sovereign debt is merely an opportunity for the eyes to glaze over and a sound sleep to ensue!

But consider, ‘…the yield on the benchmark 10-year German bund: it soared to as high as 0.95 percent Thursday as of 9:03 a.m. London time from as low as 0.049 percent on April 17. Similar-maturity U.K. yields climbed to 2.14 percent, the highest since November.

The yield on 10-year Treasuries climbed three basis points to 2.40 percent, the highest since October and up from as low as 1.64 percent in January…‘ (Source)

Here is a visual of the move in the global credit markets using a one-year chart of the Bloomberg Global Developed Sovereign Bond Index (Source)…

sovereign debt,interest rates,real estate

The truth is that for Americans the recent spike in global bond yields may have far-reaching implications regardless of where you live and the job that you do.

Higher yields translate into higher mortgage rates that would likely result result in a slowdown in the real estate sector.

This is a sector that the experts will tell you has been one of the drivers of what has to date been an anemic economic recovery here in the U.S.

Higher interest rates will have an impact on corporate earnings along with providing an alternative to investors for the stock market.

Somewhat reasonable yields in bonds could add fuel to an earnings inspired equity sell-off due to the fact that investors who had been forced out onto the risk spectrum in a reach for returns will be able to find them instead in the ‘relative’ safety of the bond market.

I say relative safety because bond investors, particularly the ones who invest in mutual funds, would face risk to their money if interest rates continue to rise after they have bought in.

Lower stock prices? A sell-off in the stock and bond markets? A slowdown in real estate and potential softening in the prices of the homes where many Americans have the bulk of their wealth?

All of that would combine to lower consumer confidence that would have an impact on retail sales. Certainly if you lose some confidence in the future you would be hard pressed to purchase anything but the staples.

And none of this takes the shadowy and multi-trillion dollar world of derivatives into account!

Here is an interesting analysis of the derivatives market, central banks and bonds…

…Derivatives are a $1 quadrillion ticking time bomb, soaked in gasoline and sprinkled with gunpowder. The volatility we are now seeing are the matches! While we have had two “saves” where the central banks have stepped in and bought debt to steady the markets, the day will come when it does not work. This game has gone on for a very long time and resulted in a mania where most all of the players are “long”. The only potential new longs left are the central banks themselves who can only buy more debt with money created by debt. The day will come when the ability to “save” is overcome. Along with it will come the freedom of prices created by Mother Nature herself. Stocks, bonds, currencies, commodities and yes, even silver and gold will finally break the chains…‘ (Source)

So to summarize, we could definitely be witnessing the beginnings of a move down the proverbial slippery slope, particularly given the sensitive state of our economy.

Unless of course we aren’t, particularly if central banks step in once again to try and save the day while kicking the proverbial can down the road.

Finally, that last statement which falls squarely on both sides of the issue leaving little room for me to be wrong, provides my best impression of a Wall Street analyst.


Article author Michael Haltman is the President of Hallmark Abstract Service in New York.

HAS is a provider of title insurance in New York State for residential and commercial real estate transactions.

For anyone either buying or refinancing a property your attorney will likely recommend a title insurance provider, although you always have the right to choose your own (click here to learn more)!

If you have any questions you can reach Michael by email at mhaltman@hallmarkabstractllc.com.

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