Lock In Low Rates Before U.S. Debt Concerns Push Them Up

The big news last Friday was the shot Standard & Poor's fired across the bow of Great Britain by warning the British that their debt was on negative credit watch. What happens across the ocean could have an effect on the interest rates you pay at home.

You see, S&P's commentary about Great Britain was sort of like having the country's credit score lowered a notch. With a lower credit score, you have to pay a higher interest rate to borrow money. This is true for governments as well as individuals and companies.

Immediately after S&P's announcement about Great Britain, investors started to ponder whether the United States was next. To date, S&P has not made any negative comments about U.S. debt and reaffirms its AAA rating. But interest rates can go up even without an official rating change.

Here's how it works:

• The U.S. government's ability to borrow at low rates is highly dependent on how investors perceive its financial strength. If there's even a hint of potential negative commentary from the ratings agencies on the status of U.S. debt, that alone may force up interest rates.
• It's also important to remember that many large investors trade U.S. treasury bonds. So if bond traders think some negative commentary may be coming, they'll try to make money on that news by betting that interest rates will rise. If that's where bond traders think the market is headed, their actions alone can push interest rates higher. Perception is everything in the bond market.

Since it's generally considered much safer to loan money to a major industrialized country such as the U.S. or Great Britain, any issues that raise their borrowing costs will probably do the same for everyone else as well.

So if you're thinking of doing any sort of borrowing for a home, auto or business, you may want to move quicker on those plans. Rates are still very low, and this environment may not last much longer.

Bottom line: Interest rates are close to all time lows. But the pressure for higher rates is building from both potential inflation and credit concerns over the size of government debt. So if you're thinking of taking out a new loan or restructuring debt, this may be the time to move ahead with those plans and lock in low rates.

As with all financial matters, consult your individual advisor before making any financial decisions.

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