Long-term investors will be excused if they're overwhelmed in the week ahead. After all, there is a crush of corporate data and economic statistics that will add noise to an already noisy investment environment. Apple reports earnings on Tuesday. On Friday, the government releases the April jobs report. And in between the Federal Reserve Open Market Committee meets for two days.
Instead of listening to the racket, watch interest rates.
The bond market is making it more expensive to borrow money. The interest rate on a 10-year bond from the U.S. government hit 3 percent in the past week; it's highest rate in four years. The trickle down effect makes other loans more expensive, such as mortgage and auto loans.
The rise in longer-term bond yields comes as shorter-term interest rates have been steadily increasing since September. The Federal Reserve's steady, but slow, march of higher interest rates more readily affects shorter-term bonds, like the government's two-year IOU. As the Fed has laid expectation of higher rates, those bonds have seen prices drop and rates rise. That has been accompanied by inflation worries and the big swings in the stock market, helping push the two-year bond yield to its highest level since 2008.
If a two-year bond interest rate trumps a 10-year bond interest rate, it has been the bond market's way of worrying about an economic recession.
Right now, the bond market is behaving: The longer the borrowing term, the higher the interest rate. This is the natural state of credit. When it gets more expensive to borrow money for shorter periods of time than longer, then the market is signaling a warning. The difference between the interest rates on the two-year government bond and its 10-year sibling is as small as it has been since the beginning of the Great Recession.
In the week ahead, the narrowing difference is a gap the Federal Reserve has to navigate carefully on its path to keep raising interest rates later this year.
