January 03, 2013 | By Scott Minerd
“As the U.S. economy continues to expand in 2013, long-term interest rates should continue to rise from their present levels. There appears to be a cap, however, on how much rates will be able to rise in the near-term. Given the adverse effect of a rising interest rate environment on the housing market, the Federal Reserve will almost certainly seek to keep long-term rates at a modest level for the foreseeable future. As a result, it would be difficult to conceive of the 10-year note rising above 2.25% within the next few years. Although an increase to 2.25% may not seem significant, that is more than 20% higher than what the 10-year note is currently yielding. Concerning the effect of rising rates on economic activity, credit spreads are likely to continue to tighten despite any rises in rates, meaning the impact of rates backing up will be fairly muted.”
Mortgage applications have historically been highly sensitive to changes in interest rates. The chart below highlights the relationship between changes in U.S. 10-year Treasury yields and home mortgage applications. Typically, periods of rising interest rates hamper mortgage applications, and consequently reduce the volume of home sales. Given this relationship and the Fed’s emphasis on supporting the U.S. housing sector, it appears unlikely the Fed will allow interest rates to rise materially in the near-term.
Source: Mortgage Bankers Association, Bloomberg, Guggenheim Investments. Data as of 4Q2012.
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