Sunday, March 3, 2024
Hometalking numbersWhy higher interest rates might be good for stocks

Why higher interest rates might be good for stocks

It's the biggest fear for stock investors: Higher rates. But, as the benchmark US Treasury 10-year bond's yields set in at 3% – nearly double where it was just a few months ago – a funny thing is happening in the market. Investors seem comfortable with higher rates, at least for now.

"We've kind of hit a plateau here," says CNBC contributor Andrew Busch, editor and publisher of The Busch Update. If rates don't move higher soon, they may stay range-bound for a while, according to Busch. Meanwhile, he also believes uncertainty with the federal budget deficit in a few weeks may add more volatility.

(Read: Here's why the Fed's QE program has 'no effect')

"We need to see the yield hold above 3.05% soon or we're going to trade this 2.50% to 3.05% range," says Busch. "Be careful about selling bonds, especially as we get into the February period when we start talking about the debt ceiling again."

Chad Morganlander, portfolio manager at Washington Crossing Advisors, believes rates will head higher.

"Our expectation for 2014 is between 3.5% and 4%," says Morganlander. "That's based on an improving US economy."

As the economy improves, credit demands increase. According to Morganlander, more of that is happening now.

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"There's one big change to the characteristic of the economy and credit that has happened over the last three months and that is that the consumer is now expanding their debt load," says Morganlander. "What you have happening here is you have an expansion of credit into the system by the private sector and that bodes well for the US economy. That's something that hasn't happened since 2008."

Morganlander also notes that in the last quarter of 2013, the total size of mortgages in the United States increased by 0.9%, according to data from the Federal Reserve Bank. That is the first quarterly increase since the financial crisis.

"That's very, very positive for the economy," says Morganlander.

As economic steam picks up and rates start to rise, investors could move their money from bonds to higher growth assets like stocks. With the market trading at traditionally reasonable valuations, some market participants say stocks could have room to run.

So, how high could rates go before investors hit the panic button? Watch the video above.

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