What is the Concern Over 3 Percent?

What happened this week in the markets? What is going on with interest rates? You may have seen that last Tuesday, the market dropped 425 points. This year to date, we’ve seen a tremendous amount of volatility in the market. If you remember me discussing this, last year was a record year – it was the second-lowest amount of volatility on record in the US stock market. Markets tend to be volatile by nature. Since we’re at all-time highs, we have to be careful that our perspective hasn’t changed. It was absolutely expected that we would have more volatility this year.

Well, this week things were choppy again, where it was way down on Tuesday, flat on Wednesday, and then the markets mainly recovered on Thursday (not all of it, but most of it). What’s going on? It was concerns over interest rates. This is a great example, in my opinion, of why we have to be careful and not get too focused on this short-term volatility in our financial planning. Doing this can cause you to make emotional investment decisions that cost you in the long term.

The 10-year Treasury Note clicked over 3 percent this past week, a number some economists have been looking at with concern. If you buy a 10-year Treasury Note, you loan money to the government for 10 years. The government then pays you interest on that loan at a fixed rate once every six months and pays the face value to you upon maturity. It made investors apprehensive when the interest rate on the 10-year Treasury note increased to over 3 percent this week. To put that number into perspective, the Treasuries were down under 2 percent in November 2016, a number it had hovered around for a couple years. In my opinion, the Federal Reserve have been keeping interest rates abnormally low with their interest rates policy.

The concern is, once the Federal Reserve starts easing that pressure on interest rates, we’ll have inflation. Going over 3 percent became this kind of this magic bullet that people have been looking at thinking, “Oh my gosh!” Really, though, what’s the difference between 2.95 percent and 3.02 percent? There’s not a huge difference.

There are economists who look at the technical analysis and think “If interest rates get to 3 percent, it may go higher, it may go to 3.2, and then if it gets to 3.2, it may get to 3.5!” However, just because interest rates got to 3.02 doesn’t automatically mean it is going to 3.3 percent. It is true that interest rates are slowing increasing. From my perspective, I think interest rates between 2.8 and 3 percent is probably a good spot for the balance and equilibrium of our economy.

Is there a concern that interest rates could go higher and we could have inflation? Well, sure. But is there a significant difference between 3.02 and 2.98 percent interest rates? No. The market fluctuations this week is a perfect example of hyper-sensitive markets where the markets get crazy-volatile over short-term news. While rising interest rates are something that should be tracked, there’s no way that the markets should go down almost 500 points because interest rates went from 2.97 percent to 3.02. That’s just kind of silly to me.

Increasing interest rates do need to be watched and tracked – that’s what I do; that’s what we do in our practice. Don’t overreact to that stuff, though. Live your life, focusing more on the long-term. Don’t worry so much about 1 week in the grand scheme of things.