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Pimco's Gross: Interest Rates to Soar as Era of Cheap Credit Ends

By    |   Monday, 12 April 2010 11:38 AM

The ever expending U.S. debt burden could send the nation's interest rates soaring, warns star Pimco bond fund manager Bill Gross.

“Americans have assumed the roller coaster goes one way,” Gross says.

“It’s been a great thrill as rates descended, but now we face an extended climb,” he told The New York Times.

The 10-year Treasury yield recently jumped to 4 percent for the first time since June. Pimco has taken part in a broad sell-off of government debt, which has pushed up interest rates, the Times reported.

The Congressional budget office estimates that government debt will balloon to 90 percent of GDP in 10 years. An outbreak of inflation could boost rates too.

And the Federal Reserve’s recent completion of its $1.25 trillion of mortgage security purchases also is putting upward pressure on interest rates, experts say.

Since exploding to double digits during the Carter administration, interest rates have steadily dropped.

“We’ve had almost a 30-year rally,” David Wyss, chief economist for Standard & Poor’s, told The Times. “That’s come to an end.”

Consumers will likely feel the effects of higher rates first in the housing market, where each increase of 1 percent in rates can add as much as 19 percent to the total cost of a home.

The rate for a 30-year fixed rate mortgage has risen half a point since December, hitting 5.31 last week, the highest level since last summer.

“Mortgage rates are unlikely to go lower than they are now, and if they go higher, we’re likely to see a reversal of the gains in the housing market,” Christopher Mayer, an economics professor at Columbia University, told The Times. “It’s a really big risk.”

Consumers will also feel interest rate pain from credit card companies and car loans.

The Federal Reserve reports that the average interest rate on credit cards reached 14.26 percent in February, the highest since 2001, while rates at auto finance companies rose from 3.26 percent last December to 4.72 percent in February.

The credit card increase will add about $200 a year in interest payments for the typical American household — and card issuers are likely to increase rates to 16 or 17 percent by the fall, says Dennis Moroney, a research director at the TowerGroup.

“The banks don’t have a lot of pricing options,” Moroney notes.

“They’re targeting people who carry a balance from month to month.”

Total U.S. household debt is now nine times what it was in 1981 — rising twice as fast as disposable income over the same period — yet the portion of disposable income that goes toward covering that debt has increasing less than 2 percent.

And though household debt has been dropping for the last two years, it still exceeds disposable income by $2.5 trillion.

Meanwhile, Morgan Stanley sees the 10-year Treasury yield jumping to 5.5 percent this year.

"We've never seen this much Treasury supply in the history of the bond market," the firm’s chief interest rate strategist Jim Caron told The Wall Street Journal.

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The ever expending U.S. debt burdencould send the nation's interest rates soaring, warns star Pimco bond fundmanager Bill Gross. Americans have assumed the roller coastergoes one way, Gross says. It s been a great thrill as ratesdescended, but now we face an extended...
Monday, 12 April 2010 11:38 AM
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