What the Fed's Non-Taper on Bonds Means for You
NEW YORK (TheStreet) -- We've been waiting since spring for the big "taper," with all the smart money betting it would come Sept. 18. Now that the Federal Reserve has decided to hold off, what does it mean for borrowers, savers and investors?
The taper was to be a cutback in the Fed's $85 billion-a-month bond-buying program, which has helped keep interest rates low. The Fed said last week that the economy had not improved enough to start winding down the program.
Though the Fed had not intended for the taper to cause interest rates to rise, mortgage rates and bond yields had been drifting up as the market anticipated the long-term effects of a new Fed policy. The Fed's announcement made it fairly clear that the length of the taper delay depends on the economy, so the delay could last some time, probably keeping rates from rising much further if at all.
Mortgage shoppers would probably be wise to sit back and watch for a week or so. It seems unlikely rates will rise, and they could drift down a bit, though probably not to the sub-4% level of spring.putting their homes on the market, or of adjusting the asking prices of homes already for sale, should likewise watch the market a bit before making big decisions. The threat of rising mortgage rates had caused some buyers to rush to buy, while it drove others to the sidelines. It's impossible to predict buyers' reactions to the new situation, but it seems unlikely that flat or lower rates will dampen demand for homes. If demand perks up, as it has been recently, sellers might get higher prices. Buyers, of course, should do the same analysis. If rates aren't going to rise significantly, there's no hurry to get a mortgage, but if home prices show signs of rising briskly, it would pay to buy now rather than later. For savers, the Fed decision means continuing to live with the depressingly low interest earnings. The best policy is to cherish the safety you get with federally insured bank accounts and choose your bank on the basis of convenience. It's not worth changing banks just to get a minuscule gain in savings yield. five-year CD is a lot more generous than a three-month CD paying only 0.082%, but unless you'd invest hundreds of thousands of dollars, the earnings difference would still be pretty small. And you'd kick yourself if you were tied up for five years and CD yields were significantly higher a year from now. Investors, of course, always have a dilemma in choosing between stocks and bonds. No one knows what will happen, but bonds still look pretty risky. Rising rates drive bond prices down, because investors favor newer bonds with higher yields. The effect isn't so bad on short-term bonds because investors know they will soon get their principal back for reinvestment at higher yields. But long-term bonds can be hammered by higher interest rates. Though the Fed has held off any moves that could raise rates, those moves will come eventually. If you invest in a 10-year Treasury note, you could lose money if you have to sell it before it matures. And keeping the bond would mean living with a 2.7% yield for a decade. Yields are sure to be higher than that sometime in the next few years. So with bond investments, stay short-term.
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