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Why is Wall Street worrying about rising rates?

NEW YORK (AP) – Interest rates continue to rise, և Wall Street continues to shake.

The 10-year Treasury yield rose above 1.50% on Thursday, rising from the Federal Reserve’s comments, which helped send Wall Street shares on another slide.

The rate of return on earnings has forced investors to reconsider how stocks, bonds and any other investment are valued. And the immediate verdict was made in selling them at low prices, in particular, the most popular investments of the last year.

Meanwhile, mortgage buyer Freddie Mack said on Thursday that the average interest rate on a 30-year fixed-rate home loan had risen from 2.97% last week to 3.02%, breaking the 3% mark for the first time since July 2020. Ratings remain at an all-time low. when the epidemic reverses economic tensions towards recovery; A year ago, the benchmark interest rate was 3.29%.

The treasury’s profitability was growing optimistically for the economic recovery, following a year of misfortune caused by the coronavirus, as well as expectations of higher inflation. That’s key, because profitability is the cornerstone that the financial world uses to try to figure out what the value of Apple stock is from worthless bonds.

For years, the returns of Treasurys have been extremely low, which means that investors have earned very little interest in owning them. This, in turn, made stocks and other investments more attractive, raising their prices. But as the Treasury returns, so does the pressure on other investment prices.

Here is a look at why the recent steps have been so rocky.

Why are the treasury profits growing?

Part of that is rising expectations for inflation, which is perhaps the worst enemy of bond investors. Inflation means that future bond payments will not be as expensive as the price of a banana or a bouquet. Thus, when inflation expectations rise, bonds become less desirable, and their prices fall. It increases their yield.

Treasury returns also often fall short of growing economic expectations. When the economy is healthy, investors are less likely to master Treasurys, which is considered the safest investment.

Why do falling bond prices mean rising yields?

Say I bought a $ 100 bond that pays 1% interest rate, but I’m worried about rising inflation, I do not want to stay with that. I’m selling it to you for $ 90. You get more than 1% return on your investment because regular bond payments will still be the same amount as when I had it.

Why is inflation rising և growth expectations?

Coronavirus vaccines, I hope, will become more economical this year, as people feel comfortable returning to stores, businesses reopening, and workers getting jobs again. The International Monetary Fund expects the world economy to grow by 5.5% this year after falling 3.5% last year.

A stronger economy often coincides with higher inflation, although it has largely failed for decades. Congress is also close to pushing another $ 1.9 trillion into the US economy, which could boost growth and inflation even further.

Why do interest rates affect stock prices?

When trying to figure out how much a stock is worth, investors often look at two things: how much cash the company will make and how much they will pay for every $ 1 of that cash. When interest rates are low and bonds pay less, investors are willing to pay more for the latter. They do not lose much income if they put that money in the treasury instead.

And now those rates are rising?

The recent increase in profitability is forcing investors to recoup how much they are willing to spend on each $ 1 of the future company’s income. This raises difficult questions, especially when critics have already argued that stocks are approaching dangerous levels after their prices rose much higher than profits.

Shares with the highest earnings prices hit hard, as do stocks that bid for their expected future earnings. Big Tech shares or in that camp. Dividend stocks are also hurting, as income-seeking investors can now turn to bonds, which are safer investments, instead.

The final concern is that inflation will turn at a much higher rate at some point.

Aren’t interest rates really low yet?

Yes, even at 1.54%, the 10-year treasury yield is still 2.60% lower than it was two years ago or 5% two decades ago.

“The concern is not that 10 years is 1.50%,” said Jung-Yu Man, chief investment strategist at BMO Wealth Management. “It means that in a handful of weeks it went from 1% to 1.50%. What does that mean for the rest of 2021?”

Ma thinks it could continue to rise above 2% by the end of the year, but he does not see it returning to the old norm of 4% or 5%, which will force even greater revaluations for markets. Until that becomes clear, he says he is looking for a stock market to stay volatile.

Are the stocks really not high yet?

Yes Despite the recent downturn in the market, major US stock indexes all remain within the all-time highs of the last month. The S&P 500 is still at 4.2% of its February 12 record.

Didn’t the Fed say it would keep interest rates low?

Yes, the Federal Reserve directly controls short-term interest rates, և President Jer Jerome Powell has repeatedly said he is in no hurry to raise them. It also has no plans to cut its $ 120 billion monthly bond purchases, which are used to put pressure on longer-term interest rates.

Powell said the Fed would not raise its benchmark interest rate, now from a record low of 0.25%, until inflation rises slightly above its 2% target. Powell has repeatedly said that while rising prices may accelerate in the coming months, the rise is expected to be temporary and not a sign of long-term inflation threats.

He reacted again to the announcements on Thursday, but analysts said longer-term yields grew out of frustration that Powell was not offering anything stronger to ease recent price hikes.

“We think our current political position is appropriate,” Powell said.

Wall Street is still optimistic.

Yes, much of Wall Street still expects stocks to continue to rise. One reason is that many investors agree with Powell that they expect inflationary pressures to be only temporary. We hope that this should not increase the pace to dangerous levels.

In addition, after the tragic events of most companies in 2020, investors in the banking sector said that the growth of corporate profits will erupt more people who receive COVID-19 vaccines during the year, և the economy is gradually approaching normal. If earnings are high enough, stocks may remain stable or even higher despite rising interest rates.

Some companies do well when interest rates go up.

Financial companies, especially banks, have been making a profit lately, as rising rates could mean higher profits from various consumer loans, including mortgages. And if inflation is rising, energy companies could benefit if prices for oil and other commodities rise.

In general, however, rising interest rates are hampering companies as they make borrowing more expensive. This is especially true for companies such as real estate investment trusts or REITs, which require large sums of money to operate, often with debt.

People who rely heavily on credit can also cut back, which can have a huge impact on all companies that rely on consumer spending.

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