Newspaper article St Louis Post-Dispatch (MO)

Interest Rates Will Go Higher - but How High?

Newspaper article St Louis Post-Dispatch (MO)

Interest Rates Will Go Higher - but How High?

Article excerpt

Get ready for higher interest rates. But how high are they going?

Wall Street analysts said that after the recent report of 140,000 new jobs being created in the U.S. in March, the 30-year U.S. government bond is likely to easily surpass the 7.5 percent level in the months ahead. And that will drive up the cost of everything from home mortgages to car loans.

Bond prices have been rising and interest rates falling over the last couple of weeks as a predictable rally occurred at the end of the first quarter. The 30-year U.S. government bond peaked at 6.76 percent in mid-March and rallied for several weeks, causing the yield to drop back down to the 6.58 percent level. Professional portfolio managers and investors, especially the banks in Japan, were likely to attempt to keep the value of their bonds up until the books for the first three months of 1996 were closed. Because economic news over the past month was cooperative, the bond market rally was sustainable. On April 5, the interest rates on 30-year bonds rose sharply and the price of the bonds collapsed after Washington announced that 140,000 new jobs were created in March. That's on top of the improbable 624,000 non-farm jobs that the government now says were created in February. (That figure was revised slightly downward from the 710,000 jobs first announced.) Wall Street had only been expecting 65,000 jobs to be created in March. And experts figured that the February job growth was a fluke that would be changed once the government statisticians sobered up and got a chance to look at the figures more closely. So, April 5th's number just wasn't what Wall Street wanted to hear. Luckily for Washington and for investors, the stock market was closed for Good Friday and didn't get a chance to react to the trouncing taken by bonds. Wall Street's concern is simple: too much job growth produces too much income, which causes inflation, which forces interest rates higher, which causes bond prices to drop and yields to rise, which could scare people out of the stock market. Washington knows this and tried all week to prepare the financial community for the worst, if that's what you can call too many jobs. Before he left Paris for his ill-fated trip to Croatia, Commerce Secretary Ron Brown and Joseph Stiglitz, head of the President's Council of Economic Advisers, started telling anyone who would listen that job growth would be good in March and that the February number wouldn't change much. Stiglitz was quoted by Market News, a wire service, as saying that "the probability that (the February labor number) was a little too high is pretty high" but that after the number is corrected "it will still be an impressive performance." Brown simply predicted a rise in jobs. Labor Secretary Robert Reich predicted that the February job growth would hold up. …

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