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Time to Lock in Interest Rates?

October 29, 2012
By: Fran Howard, AgWeb.com Contributing Writer
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For those producers who have been fence sitting, hoping interest rates will head even lower, now is the time to move.

"Certainly in the short term, interest rates, both short-term and long-term, will remain low, but some long-term rates are out of the Fed’s control," says Ernie Goss, economist with Creighton University, Omaha.

As the debt crisis in Europe improves and the U.S. economy strengthens, global investors could start pulling money out of the frothy U.S. bond market and start to look to European bonds for better returns. "When and if that happens, long-tern interest rates will move higher and quickly," says Goss.

The Federal Reserve’s third round of quantitative easing, known as QE 3, entails the purchase of $40 billion in mortgage-backed securities each month. The Fed began purchasing the securities in mid-September, immediately after announcing the move, but has not given an indication as to when the program will end.

In September, the Fed indicated that it plans to keep short-term interest rates low until mid-2015. Earlier the central bank had said rates would remain low until late 2014.

"Our view is that in the short term, the Fed is going to win," says Jase Wagner, vice president of capital management for AgStar, Apple Valley, Minnesota. "Short-term rates will be very low for a while, and the QE programs will hold long-term rates low for six to 12 months."

Wagner expects long-term rates to test their recent lows in the first quarter of next year, providing an opportunity for producers who have variable-rate mortgages on either their homes or farmland and who are willing to risk waiting.

"If you had a great year and are sitting on a lot of cash, you might be in a situation where you can wait, but if you are worried at all, now is a good time to lock in rates," says Wagner.

Others are more wary. "Betting on lower interest rates is not the right side of the bet to be on," says Goss. "I would get locked in for as long of a period of time as I can at a fixed rate. But I’m a cautious person."

Factors, other than the current QE programs, that could push long-term interest rates lower include a worsening debt crisis in Europe or continued gridlock following the 2012 presidential election.

Three factors could push long-term interest rates up relatively quickly: investors could decide that U.S. bonds are no longer the safe haven they have been; the U.S. economy could strengthen pushing both the inflation rate and long-term interest rates higher; and third, the fiscal cliff—expiration of the Bush tax cuts and the 2 percent temporary payroll tax break as well as predetermined spending cuts.

For instance, says Goss, a scenario in which rates move higher in 2013 would be if the risk of Spain, Italy, and Greece defaulting on their debt subsides, the fiscal cliff is settled, and oil prices spike. "Even if the economy doesn’t improve, we could see some inflation in 2013 due to a spike in oil prices or a supply disruption," says Goss.

What happens to long-term interest rates should be of particular interest to all producers, even those without variable-rate debt. "Increasing rates could take some of the air out of the farmland price bubble," he adds.
 


 

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