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Yield on the 10-year Treasury bond nearing 3 percent

Economists explain why consumers should care

Photo (c) sakkmesterke - Fotolia
The yield on the U.S. government's 10-year bond, which had been struck at around 2 percent for years, is suddenly rising and is almost at 3 percent today.

For Wall Street investors, rising bond yields can be a warning sign. Stocks that were cheap at a 2 percent yield look more expensive when these interest rates rise. Consumers with stock portfolios can expect this year's volatility to continue for a while.

Five percent is about average

But rising bond yields may mean more than that for consumers. Robert Frick, corporate economist for Navy Federal Credit Union, doesn't think the jump in bond yields is the result of fundamental changes in the economy. Rather, he says rates are just getting back to normal.

"The long-term average of the 10-year is about 5 percent, but that's easy to forget considering we've had artificially low rates since the Great Recession," Frick told ConsumerAffairs.

Economist Joel Naroff, of Naroff Economic Advisors, believes rising bond yields serve as an inflation warning. In fact, he predicted rising prices when Congress passed the landmark tax cut and stimulus bill last December.

"What did anyone expect when you cut taxes when the economy is solid and the labor markets are tight?" Naroff asked. "Rising inflation was going to happen, was forecast by most economists and only the naive among us thought that you could implement massively expansionary fiscal policy when it wasn’t needed without any negative impacts."

Benchmark for interest rates

The 10 year Treasury note is a key benchmark for many interest rates consumers pay, so when yields rise, so do interest rates.

"The impact on consumers will be higher rates for those with variable rate loan products and on mortgages," Naroff said. "For many who have had variable rate products for a while and who didn’t see much change, they could be in for a shock, especially if the Fed keeps raising rates, as expected."

Frick agrees that rising interest rates may be the effect consumers feel most. Since mortgage rates are affected, he says 2018 may be an opportune time to purchase a home, while rates are still relatively low.

There may also be a positive effect for consumers, especially those who put money away in savings. For well over a decade the interest paid on savings has been paltry, often less than 1 percent. This month, several banks have increased the interest rate paid on a one year certificate of deposit (CD) to over 2 percent.

That's still low by historical standards, but it’s much higher than typical interest paid on deposits over the last decade.

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