What happens next Where's my refund? Best CD rates this month Shop and save 🤑
MONEY

10-Year Treasury yield jumps back up to 3%

Matt Krantz, and John Waggoner
USATODAY
  • 10-year Treasury yields rise above 3%25
  • Fed minutes showed policymakers had a wide variety of views on the pace of tapering
  • Strong job numbers make investors see strong economy

Long-term interest rates pushed back over 3% Wednesday and are holding around those levels, causing investors, savers and borrowers to wonder how a world of higher rates will affect them.

10-year Treasury yields rise above 3%.

The 10-year Treasury revisited the 3% yield threshold, up from 2.94% Tuesday, just before the Federal Reserve released minutes from the December meeting.

T-note rates, which move opposite of prices, closed at 2.99% after the minutes were released. Investors, though, are increasingly feeling rates could march higher still this year as the central bank cuts back its monthly buys of government debt.

Higher rates are possible as there are growing signs the economy is firming and the Fed will cut back on stimulus. Part of the rise in rates came Wednesday due to much better than expected numbers of jobs from a report from private payroll processor, ADP.

How high rates can go is subject for debate. The yield in the 10-year Treasury could rise 0.5 percentage points in 2014, says Jeffrey Rosenberg, chief investment strategist of fixed income for BlackRock. But it's becoming more clear how a world of higher and rising rates will affect several groups, including:

* Bond investors. Higher rates are poison for bond investors: Bond prices fall when interest rates rise. Bond fund investors learned that the hard way last year, when the average U.S. government securities fund fell 3.6%, including reinvested interest. Typically, funds that invest in short-term bonds aren't hurt as badly by rising rates: Short-term government bond funds, for example, fell 0.40% last year.

* Homeowners and home buyers. Just as they're enjoying house price appreciation, homeowners face a pinch from higher rates. Mortgage rates, which follow 10-year T-note rates, should rise this year, says Michael Englund, chief economist for Action Economics. But the rise probably won't be as sharp, given relatively modest economic growth in 2014. "We're looking for a more modest climb on the 30-year fixed-rate mortgage, to 5.10% to 5.25%," Englund says. The average 30-year mortgage rate was 4.53% the week ended January 2, according to mortgage giant Freddie Mac.

* Savers. Insultingly low rates will continue to plague those who stash cash. Short-term interest rates should remain little changed this year, says Englund. The Federal Reserve has said it won't raise short-term rates until unemployment hits 6.5% or less – something that probably won't happen until 2015. That's bad news for savers: Interest rates on bank CDs and money funds follow short-term interest rates.

But while higher rates will certainly have a direct hit on borrowers, especially those in the housing market, they are incremental and not enough to spell doom for the economy's recovery, says Jack Ablin of BMO Private Bank. "If there was any chance the higher rates would snuff a recovery, rates probably wouldn't go up," he says. "It's the artificial demand from the Fed that's disappearing."

Featured Weekly Ad