Interest Rate Spike: Correction or Catastrophe?

Interest rates have risen at an alarming pace over the past month. We all knew a rate increase was inevitable, but no one expected it on this kind of scale. In the last six weeks US treasuries have jumped 115 basis points—with a 25 bps uptick since the 4th of July alone. Is this simply a correction, or just the beginning?

Long-term treasuries are virtually at the same level they were two years ago, before the Fed began its quantitative easing program. The possibility of a reduction in QE over the next six months is a major shift from the previous stance, which projected indefinite easing until unemployment dips below 6.5%. Citing modest signs of growth in the economy, it seems the Feds have made up their mind and the market has adjusted accordingly. Unlike 1994 when the rise in rates was led by an increase in the funds rate, this market increase is a reflection of expectations and feels more like a correction. Regardless, it’s safe to assume the days of ten year fixed loans in the 3% range have come and gone.

It’s shocking to see rates a full percent higher from where they were earlier in the year. With an improving economy and an end in sight for quantitative easing, this seems to be our new reality. While it might be a tough pill to swallow, the new rate environment is still attractive from a historical perspective.

Some lenders have reacted quicker than others to the market changes. CMBS lenders and large insurance companies have adjusted in real time, while banks, credit unions, and small life companies have been slower to adjust. A few lenders have priced themselves out of the market all together until the dust settles. Correction or otherwise, history and experts tell us rates will continue to increase—it’s just a matter of how quickly.

Ryan Gray