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Investing Specialists

Rate Woes Won't Derail the Recovery

The economy is strong enough to tolerate somewhat higher interest rates.

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In general, this week's economic numbers came in better than expected. Even the weekly data, including rail car volumes, shopping center sales, and initial unemployment claims, all showed continued improvement. Corporate news was also fine, with particularly good numbers out of  Best Buy (BBY) confirming that consumers seem more willing to spend.

However, markets continued to be riled by ongoing talks to settle the Greek debt problem and a weaker-than-anticipated European recovery. Relatively poor auctions of U.S. government bonds boosted the interest rate on 10-year bonds 0.2% in just one week, turning Thursday's Best Buy rally into a flat market.

I believe the economy is strong enough to tolerate somewhat higher interest rates. I would continue to avoid the temptation of buying long-term bonds, despite their relatively high rates versus near zero returns on many money market accounts. The economy is stronger than most anticipate, and that will probably drive rates higher from here.

Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.