INTEREST RATES

National averages at a glance

November 17, 2009

• 30-year, fixed-rate mortgage: 5.1%
• Home equity loan: 5.3%
• Credit card purchases: 15.9%
• 48-month auto loans (Chicago): 7.1%
• 10-year Treasury notes: 3.65%
• 10-year AAA corporate bonds: 4.8%
• Taxable money market accounts: 1.05%
• Bank CDs:
12-month: 1.1%
60-month: 2.4%

Caution: These numbers are national averages. You may be able to do a lot better than average by shopping around. One example: Bank of Internet has been paying around 2.5% on FDIC-insured deposit accounts.

The main financial threat in this list lies in paying today’s high prices for Treasury securities. The 3.3% yield (which moves in the opposite direction of prices) indicates investors may be worried about deflation and see Treasuries as a form of protection. But many analysts believe their fears are over-blown (see the Inflation article, “How bad will it be?”) If interest rates power up, as they may in response to improving conditions, any over-payment for bonds could be punished with crashing prices.

Self-defense: Hunker down a little: Consider moving some of your bond portfolio away from long-term instruments and toward those with a shorter term.

Fear of inflation raises rates

June 8, 2009

>> Unless you have a lot of money in bonds, why care about the interest rate they pay? The quick answer is that interest rates are the price of money, and that can affect a lot more than the return on bonds.

In the third quarter of 2009, the yield on the Treasury’s 10-year note sank to around 3.3 percent. This happened mainly because many investors think the huge amounts the government is borrowing and spending may lead to high inflation. Here’s how the rise in rates could affect you:

Raise mortgage, car loan, and credit card rates. When the price of money goes up, it affects all borrowing. This, in turn, could slow the pace of recovery from the recession. Other things being equal, people will borrow less—and buy less—when it costs more to borrow.
Increase the number of foreclosures. When interest rates go up, homeowners with variable rate mortgages have to pay more. Some of them won’t be able to afford the higher payments.
Slow down business expansion. Like consumers, companies tend to borrow less when rates go up. With less working capital, they would have to trim their plans to expand, buy equipment, and hire more workers.
Add billions to the national debt, because higher rates mean it costs more for the government to borrow, which it does by selling Treasury bonds and other securities. A high national debt can lead to higher taxes and cuts in government programs, like Social Security and Medicare.

Self-defense: First, keep track of interest rates at www.bloomberg.com or at www.finance.yahoo.com. Second, when rates go up, try to borrow less. Third, when you do have to borrow, decide it will pay to do a lot of shopping to find the lowest rates. Fourth, if you have a bond portfolio, consider replacing some of your long-term bonds with short-term instruments so you won’t be hurt as much when rates go up. (The value of current bonds will go down if rates go up, because the same amount of money earns more in the new bonds than in the old bonds.) Fifth, consider buying Treasury Inflation-Protected bonds (TIPS), which pay more as rates rise.

The bright side in all this is that the investors who fear high inflation may simply be wrong. There are good reasons why severe inflation may not occur (see Your Spending: Inflation).

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