This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

How Higher Rates Touch Consumers, Firms, Investors

When rates are low, rules require companies to set aside more money because their bond holdings produce little interest. Conversely, higher rates help: Companies can earn more on their bonds, so they don't have to invest as much.

A small increase in rates can produce big savings. The Pension Benefit Guaranty Corporation, a government agency that takes over troubled company pensions, must pay $110 billion in future benefits. It estimates that a 1 percentage point rise in rates would reduce the amount it needs to invest today by 10 percent, or $11 billion.

â¿¿ GOVERNMENT DEFICIT.

The federal government â¿¿ the nation's biggest borrower, with a $17 trillion debt â¿¿ might have the most to lose from higher rates. The super-low rates of the past few years have given the government a break on the interest it pays on the federal debt at a time when the annual deficit was soaring.

After four years of $1 trillion-plus deficits, the nonpartisan Congressional Budget Office has forecast that the deficit will shrink to $642 billion this year. That would be down from $1.09 trillion in the 2012 budget year.

The CBO factored higher rates into its forecasts. But some economists say it might not have anticipated how high rates might go. The 10-year Treasury averaged 1.8 percent last year. The CBO expects it to average 2.1 percent this year, 2.7 percent in 2014 and keep rising to 4 percent by 2018.

Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University, said those projections now look low. Still, Sohn said other trends could offset the rate rise.

"On balance, a stronger economy generating more tax revenue will be far more beneficial than the higher cost of debt," he said.

Last year, the government paid $220 billion in payments on the publicly held part of its debt. The CBO thinks that figure will be only slightly higher this year but will more than double by 2018.

5 of 6

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG

Markets

DOW 17,886.73 -89.58 -0.50%
S&P 500 2,078.14 -8.10 -0.39%
NASDAQ 4,925.0860 -22.3550 -0.45%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs