- On 14 February it emerged that US consumer prices rose 2.1% year on year in January, against the 1.9% expected.
- The ten-year bond yield rose to about 2.9%, the highest since January 2014.
- Higher rates make financing more expensive and affect asset valuations: review variable-rate debt and maturities.
On 14 February 2018 the US consumer price index for January was published. Prices rose 2.1% year on year, against the 1.9% analysts expected, and core inflation, which excludes food and energy, rose 1.8%, also a tenth above forecasts.
The reaction was seen mainly in the bond market. The ten-year US Treasury yield moved from around 2.8% to close to 2.9%, its highest since January 2014. The reading was clear: if prices rise faster than expected, the Federal Reserve could raise interest rates more quickly. And after the turbulence of the first week of February, that kept markets on alert.
What the CPI measures
The consumer price index tracks the price of a representative basket of goods and services. The annual rate compares with the same month a year earlier. Core inflation excludes the most volatile components, such as energy and food, and is used to see the underlying trend.
For the Federal Reserve, the inflation objective is 2% over the medium term. Inflation approaching or exceeding that level, with a strong labour market, is an argument for tightening monetary policy. That is why a single monthly figure can move long-term rates within hours, although, as analysts cautioned, one month does not define a trend. Setting aside the immediate reaction, the underlying question is whether inflation will keep rising, and to answer it analysts watch wages, energy prices and the inflation expectations of companies and consumers.
From bonds to the economy
The ten-year bond yield is a reference for many other rates: mortgages, corporate loans, corporate bond issues and equity valuation. When it rises, the prices of bonds already issued fall, and new loans tend to be more expensive. It is a basic mechanism, but with wide consequences.
In Europe the effect is not automatic, but it exists. Debt markets are connected, and moves in US bonds tend to spill over, with varying intensity, into European ones. For companies and families in the euro area the rates that matter remain those of the European Central Bank, but it pays to watch what happens across the Atlantic. For the saver, higher rates have two sides: they improve the return on new fixed-income investments, but reduce the market value of bonds already held, especially if they have long maturities.
What to review
In the company, a good starting point is to take stock of debt: which part is at a variable rate, which benchmark it is tied to and when it matures. If refinancing is planned, it may be useful to ask the lender how conditions would change with higher rates.
For savings portfolios, it helps to know how sensitive the fixed-income part is to rate rises, because portfolios with long maturities usually suffer more. These notes are general information, not an investment recommendation; for specific decisions, consult your adviser. In any case, short-term noise should be separated from structural decisions: a monthly figure is no reason to change the financial strategy, but it is a reason to check that it remains coherent.
When rates rise, financing stops being a detail and becomes a decision again.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
