It has been a reliable fact of life for investors, corporations, and ordinary borrowers: interest rates that, for the most part, keep heading lower.
But that may be about to change. The cost of mortgages has been going up in recent weeks. Governments are facing the prospect of higher borrowing costs down the road, and projecting increases in their debt burdens. Savers with money in bank accounts, on the other hand, have the prospect of finally earning more than a pittance on their deposits.
The interest rate charged by lenders, often cited as the single most important factor behind economic decisions, has been mostly going down since the 1980s, falling to historic lows since the financial crisis. Over the past few months, though, investors and banks have demanded higher payments for their loans, pushing up interest rates and bond yields.
The first tremors have been felt most sharply on investments products that were reliant on low rates, like bonds issued by US companies. But it is quickly spreading into the real economy.
“I think you all should be ready, because rates are going to go up,” Jamie Dimon, chief executive of JPMorgan Chase, said Tuesday.
Since the 2008 financial crisis, the Federal Reserve has taken unprecedented steps to reduce rates in an effort to stimulate borrowing and economic growth and bring down the unemployment rate. Recently, though, Ben S. Bernanke, the chairman, signaled the central bank could scale back its efforts in coming months if the economy improves. But there is much debate over when it might happen.
Several prominent money managers say the economic recovery is weakening, which will make it impossible for Bernanke to pare the central bank’s intervention and could mean rates will fall again. But some data suggest the economy is slowly recovering.
Many on Wall Street have been preparing their portfolios for a future in which interest rates do not remain at the low levels of the past few years. In a survey of 500 large investors, 43 percent said they were planning to cut back on their exposure to bonds this year, while only 16 percent are planning to increase it, according to the asset manager Natixis.
Recent efforts to adjust to higher bond yields have been messy. Investors have been piling out of supposedly safe bond funds that have been a source of reliable returns, creating unexpected volatility in the markets.
Big asset managers who borrowed money to buy foreign stocks and bonds have recently been selling those holdings, hurting markets around the world. That has been exacerbated by data suggesting that economic growth may be slowing outside the United States.
Many market specialists think that a transition could go more smoothly in the long run if interest rates rise as the US economy grows. Still, even in that optimistic situation, a wide array of market participants would have to shift their operating procedures and assumptions from a world where declining interest rates were a given.
Recent market volatility highlights the connection between Wall Street investors and consumers. Take the mortgage market. Banks set mortgage rates in line with the yields on mortgage-backed bonds. So as a sell-off has hit the market for such bonds, causing their yields to rise, ordinary borrowers end up paying more.
The rising cost of a new mortgage has pushed down the number of people refinancing old mortgages, putting a crimp on a recent source of extra income for many households.
The question is whether higher mortgage rates could stall the rally in home prices. Many analysts say homes are so affordable that even a considerable rise in rates would not do much to undermine the housing recovery, especially if the economy is growing at a healthy pace.
But Joshua Rosner, at Graham Fisher & Co., said many Americans are still so indebted that even a small rise in mortgage rates would hit the housing market: “Affordability is already a problem, and rising rates won’t help that.”