Rising bond yields are taking a toll on home mortgage and corporate lending rates and together with jumping oil prices are threatening the expected US recovery from prolonged recession.
Just as the US economy is on track to bottom out soon, long-term interest rates -- reflected by Treasury bonds -- and oil prices have jumped to eight-month highs, neutralizing the impact of government stimulus programs, analysts say.
While the short-term federal fund rate -- the interest which banks charge one another on overnight loans -- remains at virtually zero, 10-year bond yields have risen above four percent and 30-year bond yield to nearly five percent last week, the highest levels since October.
"The yield curve steepening could potentially crimp whatever nascent strength there may be in the global recovery," warned Carl Weinberg, chief economist of High Frequency Economics.
Bond yields have also jumped in Germany, Britain, Japan and Canada, fueled by fears that aggressive monetary stimulus and government borrowing in a bid to avert a deflationary spiral could fuel an eventual surge in inflation.
"If you believe, as we do, that this economic downturn is hardly over, then higher long-term interest rates will only make the ongoing recession deeper and longer," Weinberg warned.
US officials say the rising bond yields and the falling "safe-haven" dollar reflect increasing confidence of investors, who they say are rediscovering their appetite for risk as the prolonged recession showed signs of easing.
But they also underscore fears of inflation following the US Federal Reserve's actions to flood the system with money to prime the economy which has officially contracted since December 2007, said analysts and traders.
The market is also concerned over a ballooning budget deficit and national debt, factors that have also taken a toll on the greenback.
The bigger concern, especially within President Barack Obama's administration, is that home mortgage rates, which normally track bond rates, have shot up to levels that could threaten key programs encouraging people to refinance their homes.
Rates on 30-year fixed-rate mortgages have crept back to nearly 6.0 percent, up from 5.0 percent two weeks ago, shaking the fragile housing market, the epicenter of global financial turmoil.
"This threatens housing, which must stabilize before the rest of the economy can start to fully heal," said Linda Duessel of Federated Investors.
The upward pressure on home mortgages "makes it all the more difficult for qualified potential homebuyers to finance purchases, even with lower home prices and the 8,000-dollar tax credit to first-time buyers," said Frederic Dickson, chief market strategist of DA Davidson & Co.
The rising rates "may also be placing some modest valuation pressure on the stock market" and "more pressure on the US deficit as it will cost more to fund government programs," he said.
With borrowing costs, including mortgage rates, increasing sharply in the past six weeks and with product prices generally flat or falling, and housing prices still under downward pressure, "this is an effective tightening in monetary policy at a critical phase of the business cycle," said Brian Bethune, chief US financial economist at IHS Global Insight.
The yield on the 10-year Treasury bond eased on Friday to 3.788 percent and that on the 30-year bond declined to 4.633 percent after the government auctioned off 65 billion dollars' worth of debt in the week.
Oil futures prices which climbed above 73 dollars last week for the first time since October are adding to doubts to recovery hopes.
"Energy expenses have skyrocketed -- gasoline prices are up about 50 percent since late December. The increase in gasoline costs is negating much of the tax cuts that came as part of the stimulus bill," said Joel Naroff, chief economist at Naroff Economic Advisors.
Rising oil prices essentially act as a "direct, broad-based tax" that impedes consumer spending on other items, said Dickson.
"This could slow or delay the economic recovery in spite of federal economic stimulus spending," he said, warning it could "add a growing dimension of pain to many American families."