Markets

After scraping the bottom, interest rates spike

By Allan Roth

August 16, 2012 / 10:32 AM EDT / MoneyWatch

(MoneyWatch) The interest rates on benchmark U.S. Treasury bonds, which have fallen to record lows this year, are suddenly rising.

The yield on the 10-year U.S. Treasury bond closed Wednesday at 1.81 percent, up 0.41 percentage points since July 24. The 5-year bond yield has increased to 0.75 percent, from 0.55 percent, on July over that time. This represents a 28 percent and a 36 percent increase in the 10-year and 5-year bond yields, respectively.

The Vanguard Total Bond Fund (BND) declined 1.1 percent during this same period. Bond values generally move in the opposite direction of interest rates.

Is this finally the beginning of the increasing rates that experts have predicted for the last several years? Many have predicted a bond bubble that so far hasn't happened. Or is this just another short-term rise in rates that is likely to be short-lived? The Federal Reserve has stated it will keep rates low for at least two more years, but the central bank has relatively little control over anything other than short-term rates.

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The truth is that nobody knows what will happen to longer-term rates. Experts have a history of being correct on the direction of these rates less than half of the time. Once certainty is that if rates do continue to rise, then we can expect the after-the-fact forecasts that they will continue to rise.

Allan Roth

Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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