It's not just short-term interest rate hikes from the Federal Reserve that are affecting the personal finances of Americans. The recent spike in the yield of the 10-year Treasury note to nearly 3.25 percent – its highest level since the spring of 2011 – will also have an effect on borrowing costs and investment portfolios.
The yield on the key U.S. government bond – whose movements are determined by investors and traders based on drivers like economic growth and inflation – influences the prices of things, from fixed-rate mortgages to stocks.
The recent surge in the so-called long-term bond is catching the attention of Wall Street economists and money managers. Why? It's the latest sign that the nearly decade-long era of low borrowing costs is coming to a close as the economy gains steam.
Many Americans will start feeling an additional financial pinch from rising 10-year yields. That rise will make it more expensive to finance things like home purchases or kitchen makeovers with mortgages and home-equity loans that carry fixed rates. A spike in this market-driven rate could also result in market turbulence, putting a dent in the 401(k) retirement savings accounts of millions of workers who own stocks and bonds.
While chatter about the yield on 10-year U.S. government debt might not capture the attention of investors like a 500-point swoon in the Dow Jones industrial average would, the movement of this key interest rate is critical because it is the borrowing rate that many other financial assets key off.
The 10-year note is considered a risk-free investment, as the debt is backed by the U.S. government. So any increase in the yield filters through the financial system.
"The U.S. Treasury note is the foundation of the price of any other financial asset," explains Brad McMillan, chief investment officer at Commonwealth Financial Network.
Short-term interest rate hikes from the Fed have more direct impact for borrowing on credit cards, adjustable-rate mortgages and home equity lines of credit. Last week, the Fed boosted its key rate to a range of 2 percent to 2.25 percent, continuing its push that began in December 2015 to get rates back to more normal levels after cutting them to zero percent during the 2008 financial crisis. So the rise in the 10-year note, which boosts rates on fixed-rate mortgages, acts as a double whammy.
Here's how the rising yield on the 10-year Treasury can affect your bottom line:
Costlier fixed-rate mortgages
If the 10-year Treasury yield goes up, so does the rate on fixed-rate mortgages, such as the common 30-year product. That means the biggest hit will be felt by people looking to buy a new home or condo, as the cost of financing the purchase will increase as rates rise, says Greg McBride, chief financial analyst at Bankrate.com.
"As mortgage rates go up, it impacts buyer affordability," says McBride. "When you are shopping for a home, how much you can afford to buy is going to be tied to the current level of rates and what size mortgage you can afford."
The average 30-year fixed-rate mortgage was 4.96 percent in the week ending Sept. 28, according to the Mortgage Bankers Association. That's up from roughly 4 percent a year ago and within striking distance of 5 percent, a level last seen in February 2011.
The monthly cost on a $200,000 mortgage at a 5 percent rate is roughly $1,074. That is up from the nearly $955 it cost each month for the same-size mortgage at 4 percent a year ago, according to McBride.
401(k) portfolio potholes
Retirement savers could also take a hit due to increased turbulence in their stock and bond portfolios caused by rising rates. Higher borrowing costs could cause stock prices to fall amid fears that pricier debt will slow the economy, make it more expensive for companies to borrow and grow their businesses, as well as make stocks less attractive when compared with higher-yielding bonds.
"Higher bond yields are more likely to put the brakes on the stock market as it draws investment away from more volatile, riskier equities," says Chris Rupkey, chief financial economist at MUFG, a Tokyo-based global bank with offices in New York.
The Dow, for example, has suffered steep back-to-back days of declines, in part due to the recent spike in yields and fears that interest rates will move even higher. Interest-rate-sensitive stocks, such as home builders that are negatively affected by higher mortgage rates and stocks whose main attraction is their high dividend yields, are often areas of the market that feel the pain, says Todd Sohn, an analyst at Strategas Securities in New York.
Yield seekers gain
Some bond investors could also suffer: The prices of the bonds they own will fall as their yields rise (prices move in the opposite direction of yields). But there's hope for investors searching for fixed-income investments with fatter yields. If, for example, you're looking for income without taking on a lot of risk, you'll get higher returns in new investments in the 10-year Treasury note, as yields approaching 3.25 percent are far more attractive than the 2.4 percent yield at the start of the year. A $10,000 investment at 3.25 percent equates to $325 in annual interest, compared with $240 in annual interest at 2.4 percent.
"(Bond investors) could start to see more meaningful returns on those positions given higher yields," says Mike Loewengart, vice president of investment strategy at E-Trade.