Does the Fed really want rates to rise this fast?

The 10-year Treasury yield approaches 2.9% as investors worry about the Fed slowing its bond buying program. Stocks sag again to their lowest levels since July.

By Charley Blaine Aug 19, 2013 4:38PM
Federal Reserve Chairman Ben Bernanke © Richard Drew/AP PhotoUpdated: 6:12 p.m. ET

You know the old saw: "Be careful what you ask for"?

Well, just talking about tapering bond purchases, and how the Federal Reserve will still keep interest rates low, has done just the opposite.

Despite the jaw-boning by Fed Chairman Ben Bernanke, pictured, and other Fed officials, the 10-year Treasury yield, which is what mortgage rates are built on, has jumped from 1.944% in late May -- when Bernanke first began to talk about tapering, or winding down the central bank's big bond-purchasing program -- to close at 2.893% on Monday.

That's the highest yield for the 10-year Treasury security since July 28, 2011, when the yield was 2.95%.

The rise in interest rates has shaved 4.1% from the Dow Jones Industrial Average ($INDU) and 3.7% from the Standard & Poor's 500 Index ($INX) since their record closing highs on Aug. 2 -- and 2.8% from the Nasdaq Composite Index ($COMPX) since its 2013 closing high on Aug. 5. The Dow Jones Transportation Average ($DJT), watched closely as a leading indicator, has fallen 5.1% since Aug. 1.
Thanks to Monday's rate rise, the Dow closed down 71 points to 15,011. The S&P 500 was off 10 points to 1,646, and the Nasdaq fell 14 points to 3,589, a disappointing close. The index had been up as many as 21 points earlier in the day. The closes were the lowest since early-to-mid July.

It's hard to believe that anyone at the Fed saw this kind of reaction coming, much less wanted it. Bernanke has worked to keep rates low to help the modest economic recovery that began in 2009.

At the same time, the market's stress is a worry because if you see the stock market as a way at looking where the the economy will be in six months or so, the market reaction suggests the future looks, well, a touch dicey.

Rising interest rates could depress housing activity, at least in the short term. It could depress auto sales. And rising rates could cause consumers, whose confidence that they will have jobs in six months may not be very high, to think twice before buying, say, that big flat-screen television.

The tapering talk has crushed homebuilding stocks. The group has been a Wall Street darling for about two years. The iShares Dow Jones U.S. Home Construction exchange-traded fund (ITB) has fallen 20.6% since May 14. D.R. Horton (DHI) has seen its shares fall 33.7% in the same time frame. Those are bear market numbers, folks.

It has put a cap on auto stocks. Ford Motor (F) was up 35% for the year on Aug. 2. The shares are off 7.9% since. General Motors (GM) is down 7.1% since its July 24 closing high of .

The worry now is that U.S. interest rates will move so high as to pull money out of Europe, out of Asia and out of the emerging markets. The Jakarta Composite Index in Indonesia has fallen 17% since Bernanke posited the idea on May 21. India's Sensex Index is off 9.8% since a July 23 peak. Brazil's Bovespa Index is having a dreadful year and was down as much as 29% on July 3. While it has rallied up 13% since, it is still down 18.3%.

The market's slide on Monday came at the start of a busy week.

Two big economic events come on Wednesday: release of the minutes from the Federal Reserve's July meeting and the July existing-home sales report from the National Association of Realtors.

The Fed minutes will feed into the concern about the Fed and possible tapering. There is division in the Fed over whether to taper.

Also due the rest of the week: jobless claims and leading economic indicators on Thursday and new-home sales on Friday.

It's a week of big earnings as well:

On Tuesday, J.C. Penney (JCP), Home Depot (HD), Best Buy (BBY) and Barnes & Noble (BKS) report.

Wednesday brings Hewlett-Packard (HPQ), Target (TGT) and Lowe's (LOW).

On Thursday, Abercrombie & Fitch (ANF), Dollar Tree (DLTR) and Sears Holdings (SHLD) are scheduled.

Due on Friday are Ann (ANN) and Foot Locker (FL).

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