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Why the cost of borrowing is about to skyrocket

Many businesses ignore talk of the Fed, but when it has a direct impact on your wallet, you should take note. This week’s actions has caused investors to dump their securities which will make your borrowing money cost more.

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Fed dialing back on securities spending

The Fed’s announcement last week that it plans to dial back on securities spending if positive economic trends continue may have sparked a selling spree in the investor marketplace. Treasury yields were at some of the highest points seen in recent years, but substantially dropped this month following Ben Bernanke’s announcement that the Fed could severely cut its bond purchases by mid-2014. Both MSCI All-Country World Index and Treasuries have dropped 5.4 and 1.9 percent respectively.

The Fed has regularly purchased $85 billion in government debt and mortgage-backed securities over past months in order to improve the rate of unemployment in the US and make it cheaper to borrow money. That number is expected to drop to $65 billion by mid-September, according to a near majority of economists who were surveyed after Bernanke’s press conference last week.

Investors rushed to offload

At the onset of the Fed’s announcement and large drops in the market, investors rushed to offload and quickly sell some of their bonds and securities.

“The exit door is not that big and everyone’s going at the same time,” said Justin Lederer, strategist at Cantor Fitzgerald in New York. “This is not just about a Treasury backup, this is a global, everyone-getting-out-of-everything.” The drops in the Treasury yields and stocks will also likely affect the ease with which consumers and businesses borrow money. After enjoying a period of borrowing “cheap money,” the costs of borrowing will likely rise again and cause business decision makers to be more stringent in their investment purchases going forward.

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The uncertainty that investors are feeling has certainly played out in stocks and bonds performance, and they will keep a close eye on employment metrics activities as that is one of the key data points that the Fed is using to factor into what level of securities purchasing it will carry out. Thirty year bonds were able to gain back some of the initial losses that took place on Monday, but if Fed predictions hold true, even steeper drops could occur prompting more investors to sell.

Destiny Bennett is a journalist who has earned double communications' degrees in Journalism and Public Relations, as well as a certification in Business from The University of Texas at Austin. She has written stories for AustinWoman Magazine as well as various University of Texas publications and enjoys the art of telling a story. Her interests include finance, technology, social media...and watching HGTV religiously.

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