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 U.S. mortgage rates have reached their highest level in a
year-and-a-half, auto loans are getting a bit more expensive, and
corporations across the board have seen their borrowing costs jump
as U.S. and European debt retrenched in recent weeks.
With benchmark U.S. government debt having jumped from 2.13 percent
to as high as 2.49 percent so far this month, Fed officials headed
into a policy meeting next week will be asking how long the selloff
could last -- and how much it could slow the economic rebound from a
winter slump.
"It's got to be part of their calculus. And I do think that they
will try to micro-manage the market," said Craig Dismuke, chief
economic strategist at Memphis-based broker dealer Vining Sparks.
After 6.5 years of ultra easy monetary policy, Fed officials would
welcome at least some evidence of tightening financial conditions as
they increasingly telegraph a rate hike.
The concern is a repetition of 2013, when then-Fed Chairman Ben
Bernanke set off a market rout that threatened the recovery when he
suggested a stimulative bond-buying program could soon be curbed.
Investors and economists said that while the recent market move is
on the Fed's radar, given its volatility, alarm would grow if the
10-year U.S. Treasury yield were to soon rise above 2.75 percent.
Such a tightening could imperil the all-important housing market, as
it did during the so-called "taper tantrum" two years ago, which
prompted a flurry of dovish speeches by Fed officials attempting to
control the damage.
At the time, stock markets plunged and mortgage rates shot up to 4.8
percent, spooking home buyers. While today's economy does not face
that sort of trouble, there are warning signs.
A 30-year fixed mortgage averaged 4.17 percent last week, its
highest level since November 2014, prompting a rush of applicants to
lock in the rate before costs rise any more. The cost of new car
loans is also edging higher, though from a record low in the fourth
quarter of 2014.
Fed officials regularly highlight housing and autos as drivers of
what is expected to be stronger consumer confidence and broader GDP
growth in the second half of the year.
Robust job gains suggests the rebound is underway, with Fed Chair
Janet Yellen eyeing an initial rate hike this year and economists
predicting it will come in September.
Yet U.S. productivity has mysteriously sagged and wages have not
climbed as expected, leaving the economy fragile. Meanwhile, Fed
Governor Daniel Tarullo has emphasized the central bank's
long-simmering concern that markets may not be liquid enough to
withstand a volatile selloff.
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The sharp U.S. bond selloff is a response to sturdy U.S. economic
data, as well as easing concerns over deflation across Europe, which
has sent German benchmark Bunds tumbling too.
As Treasuries plunged last week, Tarullo was one of three
influential Fed officials who sounded surprisingly cautious tones
over raising rates. "We do experience cross currents from abroad and
they do affect our recovery and they affect the policy response,"
said Fed Governor Lael Brainard, who rarely discusses policy
publicly.
The commentary could hint at the central bank's response if the
selloff runs into the summer and continues to tighten conditions in
the real economy. New York Fed President William Dudley has warned
the Fed would tighten policy less aggressively if markets, including
corporate debt, respond too much.
Two years ago, yields on investment-grade corporate bonds shot from
a record-low 2.62 percent in early May to a high of 3.65 percent in
early September, or 103 basis points.
This year, since a mid-April low-water mark of 2.84 percent, the
yields have climbed to 3.38 percent, or 54 basis points. Junk bond
yields have risen from 5.98 percent in mid-April to 6.46 percent.
"At this point, I don't think there has been enough move in broad
financial conditions, including the 10-year yield, to cause the Fed
to pause (rate hikes) for longer," said Peter Hooper, chief
economist at Deutsche Bank Securities.
"This latest spate of dovishness is about keeping the foot on the
accelerator until we see the data we're expecting."
(Reporting by Jonathan Spicer; Additional reporting by Dan Burns.
Editing by Dan Burns and John Pickering)
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