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Are Higher Rates Good News?

The biggest news with regard to the markets since the election has been the spike in long-term interest rates. The stock market has been rising as well, but there seems to have been a greater reaction on the bond market side. First, before anyone pins these trends to the surprise results of the election, one can clearly see that the movement of these markets started before the election took place. The stock market rallied strongly the day before the election and rates started rising several weeks before the election. Thus, while these movements have accelerated since the election, it was certainly not a reversal of trends.

Yes, the election definitely is a factor. With a new President coming in, the markets look at all the promises made during the campaign and start adding up the costs of implementing these promises. For example, take a look at the stimulus package of President Obama, which was in reaction to the Great Recession taking place when he came into office. The difference today is, the markets can see that the same level of stimulus is not needed now, as compared to then. While the economy could be doing better, no one would argue with the fact that the we are in a hundred times better shape than we were eight years ago. Thus, while the markets may fear a huge spree to fulfil promises such as infrastructure spending, this spending does not have to come all at once, and it is not likely that Congress will be writing checks to bust a budget already in deficit.

The bottom line is that rates are increasing because the economy is doing better, and that is good news. The markets were already factoring in an increase in rates by the Federal Reserve Board before the election. That increase is still expected to come in December. As long as the Fed does not surprise the markets with a 0.5% increase, instead of the expected 0.25%, then calm might return to the markets. Remember that long-term rates do not necessarily rise in reaction to the Federal Reserve moving short-term rates upward. As a matter of fact, after the increase last December, rates on home loans decreased due to other factors. Even with the present increase, keep in mind that rates are still very low by historical standards — and that is the best news.

The Markets. Rates rose again in the past week to their highest level of the year. For the week ending November 23, Freddie Mac announced that 30-year fixed rates rose to 4.03% from 3.94% the week before. The average for 15-year loans increased to 3.25%, and the average for five-year adjustables moved up to 3.12%. A year ago, 30-year fixed rates were at 3.95%, slightly lower than today’s levels. Attributed to Sean Becketti, Chief Economist, Freddie Mac — “In a short week leading up to the Thanksgiving holiday, the 10-year Treasury yield rose 8 basis points. The rate on 30-year fixed rate loans followed suit, rising 9 basis points to 4.03 percent. This increase marks the first week since 2015 that mortgage rates have risen above 4 percent.” Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

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