Rising Rates Start to Squeeze Consumers and Companies

The New York Times reports:

The unusually low interest rates of the last three years have been an enormous boon to almost every corner of the American economy.


They have provided consumers with dirt-cheap mortgages that fed the real estate boom. They have supplied easy credit to companies and investment firms, propelling stocks and corporate profits to record highs and fueling a buyout binge.

Now that party may be coming to an end.

Yields on the 10-year Treasury note — a benchmark that influences many long-term interest rates, including home mortgages — jumped sharply on Tuesday and are up significantly in the last month. The fallout is likely to be widespread, and felt most immediately by homeowners and people looking to buy a house.

Economists said homeowners trying to refinance their adjustable rate mortgages before they reset to higher levels are already feeling pinched. The national average for the 30-year fixed-rate mortgage jumped to 6.74 percent yesterday. At the beginning of the year, the average was 6.18 percent, according to Freddie Mac, a big buyer of mortgages.

Last year, adjustable rate loans accounted for 25 percent of mortgage applications, up from 11 percent in 1998, Freddie Mac said. Demand for adjustable rate loans peaked in 2004 at 33 percent; many of those are at or near the reset point.

“It’s going to be tough,” said Adam L. Stein, president of the Washington Association of Mortgage Brokers near Seattle. “I talk to people every day looking to get the fixed rate. You give them the current rate and they say, ‘That doesn’t do anything for me.’ ”

Homeowners are not the only ones who will have to swallow higher costs. Corporations, accustomed to financing operations with cheap debt, will see their expenses rise, cutting into profits. In addition, rate increases will crimp the private equity buyout boom, which has been fed in large part by the heavy issuance of corporate debt at low rates.

“There has been a half a percentage point rise in rates while inflation has been flat, so the real cost of capital has gone up for consumers and for corporate America,” said Mickey Levy, chief economist at Bank of America. He said he expects that the increase will put pressure on stocks and damp already weak demand for housing.

The recent rate move came as something of a surprise to Wall Street. It is the result, traders say, of heavy selling by foreign investors, who may be growing concerned about inflation, and holders of mortgage securities hoping to reduce the risks associated with higher rates.

Here's a look at the yield curve.