Rates on the 10-year bond, for example, are still pretty low and may not outpace inflation over the next decade.
Ordinary investors who have soured on stocks have poured about $1 trillion into bond funds since the Great Recession. A common assumption is that bonds arent very risky. These investors might be having second thoughts.
Thats because as rates rise, bond investors can lose principal as the value of their existing bonds declines. Investors in bond funds, especially those with long-term holdings, are most at risk. The Pimco Total Return fund, the worlds largest mutual fund with $285 billion in assets, has lost 3.3 percent in the past month.
Marilyn Cohen, president of Envision Capital, fears that baby boomers will pull out of bond funds as fast as they rushed into them. If so, that could send bond prices falling further in a vicious cycle of selling spurring more selling.
Another worry is big losses at funds that have borrowed heavily to buy bonds. Using borrowed funds to invest can magnify losses. The BlackRock MuniHoldings California Quality Fund has borrowed the equivalent of 42 percent of its assets, according to Morningstar, a fund research firm. The fund has fallen 11 percent the past month.
Higher mortgage rates could lower demand for new homes. That would squeeze home builders. The share prices of leading builders like Toll Brothers, Lennar and D.R. Horton all plunged Thursday far more than the stock market as a whole.
But many builders say they remain optimistic. They think higher rates will encourage potential buyers to get into the market before rates rise further.
Were trying to encourage buyers to get off the fence, so we think it will actually help sales, said Holly Haener, director of sales and marketing at CBH Homes in Meridian, Ohio.
Eventually, if mortgage rates keep rising, some buyers would no longer be able to afford a home, Haener acknowledges. They might have to buy a smaller house or forgo some home amenities to offset the cost of a higher loan rate.
Higher rates may further depress loan demand at many small businesses, at least for the short term.
But higher rates can also benefit small businesses because they signal that the economy is strengthening. When companies start making more money because they have more customers, theyre more inclined to expand or buy equipment even though financing is costlier.
Bella Bag, a retailer of previously owned designer handbags and other accessories based in Atlanta, is getting the first loan in its eight-year history. Chief financial officer Brian Froehling said the company decided to borrow now because it thinks rates will rise.
Higher rates might give Bella Bag pause before it borrows again, Froehling said. But the company has hired four staffers this year in response to growing demand. It will likely do well even if rates rise further, he said.
Large U.S. companies have sold a huge amount of bonds to investors in the past 2 1/2 years more than $4 trillion worth, according to Dealogic, a research firm. Thats more than the economies of every country in the world except the United States, China and Japan.
The biggest sale ever was Apples offering of $17 billion in bonds in April.
But as rates began rising last month, new sales are slowing. Companies with top credit ratings sold only $9.5 billion in bonds last week, according to Dealogic. Thats 60 percent less than the average for each week through April this year.
Still, companies have been collecting record profits. That means they should still be able to expand their businesses and hire more, even if borrowing costs rise.