From the NY Times:
Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates.
That, economists say, is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession.
The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.
This is an incredibly important point going forward. First, consider this chart:
The 10-year Treasury yield has been declining for the last 30 years -- an incredibly long rally. However, it's also important to remember there are several economic events that have an impact on interest rates.
1.) The amount of debt entering the market. This is decidedly negative going forward because the US government is issuing a ton of debt going forward -- and will be issuing this debt for at least another year and probably longer.
2.) Inflation: inflation is not an issue right now, so this is a net positive for the bond market
3.) Inflation expectations: I would place this at a neutral level right now. There is a camp that is incredibly concerned about inflation right now. Consider this chart of the gold ETF:
4.) Location in the business cycle: there are times when bonds sell-off and times when they rally. Right now we're in a place where bonds sell-off because investors have a larger risk appetite.
But most importantly, the bottom line is interest rates realistically can't go any lower. That means there is only one place to go -- namely, up. And that means we'll see a negative impact on the following areas of consumer spending:
The impact of higher rates is likely to be felt first in the housing market, which has only recently begun to rebound from a deep slump. The rate for a 30-year fixed rate mortgage has risen half a point since December, hitting 5.31 last week, the highest level since last summer.
.....
Another area in which higher rates are likely to affect consumers is credit card use. And last week, the Federal Reserve reported that the average interest rate on credit cards reached 14.26 percent in February, the highest since 2001. That is up from 12.03 percent when rates bottomed in the fourth quarter of 2008 — a jump that amounts to about $200 a year in additional interest payments for the typical American household.
.....
Similarly, many car loans have already become significantly more expensive, with rates at auto finance companies rising to 4.72 percent in February from 3.26 percent in December, according to the Federal Reserve.
I don't think the run-up in rates will be fatal. In fact, we've already seen a combination of decreasing consumer credit and increasing PCEs over the last 12 months. Consider these two charts:
Note the almost inverse relationship between household debt and PCEs over the last year; they have both literally moved in opposite directions.
However, I do think there will be a difference in the way consumer's spend. For example, it use to be that so long as you even had credit, you'd go out and buy anything. That era is over. I think this new trend would be best explained by an increase in delayed gratification.
