Bond Selloff a Wild Card That Could Delay Fed Rate Hike

The sharp bond market selloff is starting to pinch American consumers and companies, causing a mild economic tightening that, if sustained, could raise alarms at the Federal Reserve and even delay a plan to hike interest rates in coming months.

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.


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Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.