3 Ways Rising Interest Rates Change the Game

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It seems that the Treasury bond market, which has been incredibly strong this year, might be topping out. If we look at shares of the iShares Barclays 20+ Year Treasury Bond ETF (NYSEARCA:TLT), we find that the fund peaked at the end of May and pulled back, and after trying to make a new high on Monday, it violently reversed without doing so on Tuesday and Wednesday. This is a sign that the Treasury bond trade could be over, and this means that we can see game-changing market effects. Here are a few of them.

1. Bonds will weaken more generally

If the Treasury market weakens, then bonds in general will weaken, as well, because other bonds are often valued relative to the Treasury market. For instance, a low-risk corporate bond might fetch 1 percent more per year than the Treasury bond of the same duration, and if that bond’s interest rate rises, then so will that of the corporate bond. We can see this impact high-yield bonds, foreign bonds, and even mortgage bonds, which brings me to the next impact of a rising interest rate environment.

2. The housing market will weaken

Most houses are purchased using debt: Buyers put a small amount of money down and they then take out a mortgage to pay for the rest. As interest rates rise, mortgage payments on new and adjustable loans will increase. In the first case, this means that an individual who can afford, say, a $300,000 house with current rates might only be able to afford a $250,000 house at a higher rate and a still lower-valued house if rates continue to rise.

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