World Economy

US Interest Rate Hike Shakes Up Financial Markets

US Interest Rate Hike  Shakes Up Financial MarketsUS Interest Rate Hike  Shakes Up Financial Markets

Interest rates could soon rise in the US for the first time in almost a decade, and that's shaking up financial markets.

Since December 2008, the central bank has held its benchmark rate close to zero to support the economy by encouraging borrowing and spending. It's been even longer since the Fed actually raised the cost of borrowing. That was back in June 2006, AP reported.

The Fed wraps up a policy meeting Wednesday and investors will be watching closely for any hints about whether the central bank is weighing a rate hike.

Stocks: Losers

Here's how the prospect of higher rates is shaping stocks, bonds, borrowing and saving:

People holding utility stocks have suffered losses this year. Utilities as a group have slumped 7.1 percent in 2015, the biggest loss among the 10 industry sectors that make up the Standard & Poor's 500 index.

These stocks typically pay dividends that are high relative to their companies' share prices.

Now, as yields on those ultra-safe bonds have edged higher, these stocks are less attractive. The yield on the 10-year Treasury note, which had dropped as low has 1.64 percent in January, has climbed to 2.06 percent.

Dividend-rich stocks, which carry more risk than Treasury, look less attractive. Other stocks that traditionally pay big dividends to investors, such as telecommunications companies, have also started to struggle. Telecoms have fallen 3 percent this month.

Possibly the biggest impact on stocks has been from the currency market, where the dollar has surged.


Stores, restaurants and media companies should be among the better performers this year as the US economy continues to strengthen and hiring picks up. Low gasoline prices will put more money in people's pockets, also helping consumer-focused stocks.

Consumer discretionary stocks are the second-best performers of the sectors that make up the S&P 500. The industry group is up 4.5 percent since the start of 2015.

Bonds: Losers

The biggest threat to investors from rising rates could come from the investment considered the safest, namely US Treasury, says Jim Paulsen, chief investment strategist & economist at Wells Capital Management.

Prices for Treasury notes have rallied since the start of 2014, sending their yields lower. But as economies in other parts of the world struggled or slowed, investors bought more ultra-safe Treasury, and drove prices higher.

The unemployment rate has fallen to a seven-year low of 5.5 percent, and most economists expect the economy to grow around 3 percent this year.


Of course, not all bonds are the same. Junk bonds, riskier securities that pay higher yields than Treasury, traditionally do well in a rising rate environment, says Rob Waldner, chief strategist at fund manager Invesco.

The bonds are issued by companies that have a relatively high amount of debt compared their earnings. The earnings of these companies typically rise when the economy is improving, and that offsets the impact of higher interest rates.

Since the start of the year, junk bonds have handed investors a 2 percent return, according to the Barclays US High Yield index, which tracks the performance of the securities.

Municipal bonds, issued by local governments, also tend to do well for the same reason as junk bonds.

Impact on Consumers: Savers

If you're relying on savings, you'll probably welcome higher interest rates. The best rates on one-year certificate of deposits are about 1.2 percent, according to Higher rates will boost your income.


As rates rise, people with large credit card balances may face higher payments. So could those looking to buy a home.

Mortgage rates, which are linked to Treasury yields, will climb should bond yields start to rise. The average 30-year mortgage rate is at about 3.7 percent, according to Freddie Mac. That compares with about 5.9 percent a decade ago and 7.9 percent in 1995.