This afternoon, interest rates on the 10 and 30 year T-notes are surging higher again. The yield on the 10year T-note bottomed on July 24, 2012 at 1.39 percent. Since that low point yields have soared higher by 41.0 basis points to 1.805 percent. Anyway that you slice it or dice it this is a strong move higher in bond yields in such a short amount of time. This increase in bond yields will cause mortgage rates to rise and make for higher borrowing costs in the future.
Yields are rising despite the Federal Reserve Bank’s Operation Twist program. This tells us that there is a seller in the bond market and it is likely to be a large holder of bonds. Many traders are now under the assumption that China could be selling U.S. Treasuries to try and combat inflation that is already plaguing the nation. We shall see soon enough.
When interest rates go higher there are some stocks that will be adversely affected. Utility stocks are usually one of the first stock sectors to suffer if interest rates rise. Traders can easily see how the Utilities Select SPDR Fund (NYSEARCA:XLU) has sold off since late July. Other leading utility stocks that have come under selling pressure recently include Consolidated Edison Inc (NYSE:ED), The Southern Company (NYSE:SO), and Duke Energy Corp (NYSE:DUK). All of the utility stocks have been market leaders throughout 2012, however, if interest rates continue to rise that leadership role could be coming to an end. The housing stocks are also likely to suffer if yields rally higher, however, interest rates are still very low historically.