Bond Investors Suffer Worst Losses In 2 Years:
Chris Mayer / June 8, 2007

Well, it’s the big topic of the last couple of days and so it deserves comment, I suppose. I’m talking about the sharp spike in Treasury rates. In particular, the 10-year note, which topped 5% — the first time it’s been that high since last July.

The rate on the 10-year is up 10% in a month. As rates rise, bond prices fall. This kind of market action squeezes bond investors like an orange in a juicer.

Much hinges on the old 10-year note. In my banking days as a corporate lender, it was the only rate I watched every day. The pricing of many loans ties to this security. A spike, like the one we’ve had, is what we use to call a deal killer. Because, inevitably after such a spike, there were at least a few loans that we know would never get to closing since it would result in an interest rate unacceptable to the borrower.

Lending is a tight business. To the marginal borrower every tick matters. To
the loan officer trying to shoehorn in a deal before quarter-end, it is the
difference between a nice bonus and a token one.

So much turns on the easy credit we’ve enjoyed. The whole buyout boom depends on cheap money to finance the buyouts. The stock market’s rise
depends, at least, on low interest rates. When the 10-year Treasury doesn’t
even pay 5%, the stock market, even at 20x earnings, starts to look like a
better bet. With rates at 6 or 7%, the comparison gets tougher.

Hence, the big sell-off in recent days. If rates keep rising, a lot of will change in today’s market. — Chris Mayer

• View all of the Crisis & Opportunity Quick Takes >>