If the price of bonds continues to go down, the already pathetically slow U.S. economy will weaken some more, corporate profits will suffer, the stock market will come under additional pressure and you'll pay higher rates on loans, especially mortgages.
Here's what has been happening.
Interest rates on 30-year government bonds were 4.17 percent on June 13, which you might remember was before the last Federal Reserve rate "cut." Now? Yesterday that same bond is yielding a whopping 4.90 percent.
And the rate went up to nearly 5 percent at its worst point yesterday.
Rates move in the opposite direction of bond prices. So with the drop in bond prices, things like mortgages have already gone higher and will get more expensive in the weeks ahead.
Why is this happening?
This is not normal economics. Borrowing costs aren't rising because the economy is suddenly improving or because inflation is rearing its ugly head.
Yes, inflation is worse than the government is letting on. But the bond market usually takes Washington at its word on cost increases.
This time, rates are rising because of things like the federal deficit (now projected to be $455 billion this year), the tax cut and the seeming helplessness of the Fed to enact monetary policy.
In short, buying bonds suddenly looks like a bad bet if the United States is a driverless car headed down a steep incline.
This could be the big financial story of '03. So pay attention!
Why you should care about the bond market meltdown
Surfer
50
18-07-2003 02:01
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