With the economic recovery showing signs of sustainability, all wary eyes turn to interest rate consumer products – mortgages, auto loans and credit cards – as several factors in recent days indicate a climb out of historic low ranges.
But the question remains: How fast and how far will rates go?
Housing market analysts generally agree on long-term mortgage rates near or at 6 percent by the end of the year. The 30-year fixed mortgage climbed to 5.21 percent this week, the highest level since August.
Credit card rates – which the Federal Reserve said averaged 14.26 percent in February – are poised for 16 percent or higher by the fourth quarter, credit industry analysts forecast. Card issuers are grappling with revenue losses from credit card reform adjustments, higher reserves against defaults and faltering demand.
Card rates have been steadily climbing from a low of 12.03 percent since late 2008. At the same time, revolving credit balances have declined 16 out of 17 months through February, the Fed said.
Auto loan interest rates have been steadier as car dealers continue to offer incentives to regain customers. The Fed reported an average 6.45 percent on 48-month new car loans for February – down from a peak of 7.77 percent in 2007.
Fed officials are maintaining their “extended period” pledge for its near-zero benchmark rate as a broader economic recovery finds its footing.
The housing market and an extensive credit industry contraction are two areas helping keep the Fed sentiment in place. Home sales have either flattened or declined in recent reports, despite near historic mortgage rates through last month.
But the Fed faces a delicate balancing act in heading off inflationary pressures and taming excessive market speculation
On April 1, the Fed ended its $1.25 trillion purchase program of mortgage-backed securities initiated at the height of the financial crisis. A primary goal of the program was keeping mortgage rates low.
There are signs that private investors are returning to the mortgage-bond market since the Fed’s winding down. Trading volumes have increased and risk premiums tightened on bonds guaranteed by government-sponsored Fannie Mae and Freddie Mac.
Nonetheless, Treasury bond yields have flirted with 4 percent in recent days. The Treasury 10-year note serves as a bellwether to the longer term bond market, and to mortgages and other loan products.
Although bond yields remain low from an historical perspective, private investors are less likely to buy the Treasury’s growing new debt offerings until higher yields are in place. That trend would drive up longer term rates.
A sustained upward trend in bond yields would indicate a reversal of a three-decade decline from a top of 16 percent yields on the 10-year note.
