Markets Slide as Interest Rates Rise

Morning Business Memo…

The first three day slide for the Dow Jones index this year … a 6.4 percent plunge for Japan's Nikkei index overnight… a vicious sell-off for bonds in the past few weeks. After months of smooth sailing fear and volatility have returned to global financial markets. Stock averages fell again on Wall Street, and U.S. stock futures are down this morning.

The tumble comes with fresh doubts about the next moves by the Federal Reserve. For the past few years the Fed has been a constant with a clear policy of very low interest rates. Now there's open debate among Federal Reserve governors about what to do next. The worry has been growing ever since chief of the Fed, Ben Bernanke, said it might pull back on its $85 billion-a-month bond-buying program - known as quantitative easing - if economic data, especially hiring, improves. Now Japanese media reports are saying overseas hedge funds may be dumping the country's equities following disappointment over the Bank of Japan's decision earlier in the week to refrain from additional monetary easing measures. Investors don't like uncertainty, and that's what they appear to be dealing with now.

With rising bond yields the cost of the average 30-year fixed rate mortgage is now about 4 percent - compared with a low of 3.5 percent earlier this year. "Interest rates I think are going to go up," Frank Keating, CEO of the American Bankers Association, tells ABC News Radio. But he doesn't think that this is a threat to the housing recovery. "To cement in a 4 percent rate over 30 years is really a very good deal." Keating is more concerned about another trend. "What worries me really is student debt: a trillion dollars of student loans outstanding." High loan repayments may prevent millions of young Americans from saving enough money for a down payment on a home.

Banks are seizing more homes from borrowers who've gone into default. Foreclosure listing firm RealtyTrac says from April to May, completed foreclosures went up 11 percent nationally. With rising home prices "it makes sense," says Darren Blomquist, vice president of RealtyTrac. "It's a good time for banks to do this because now they know they can sell these homes quickly." Home repossessions were down 29 percent from May last year - a sign that fewer people are falling behind on mortgage payments.

Computer giant IBM has begun the process of laying off as part of a previously announced worldwide restructuring plan, Bloomberg News reports. The changes will cost $1 billion worldwide, including severance expenses. IBM first mentions it would reduce its workforce in April after earnings numbers came in weaker than expected. According to a source speaking to Bloomberg executives and lower level employees will be among those laid off.

The House passed legislation that would exempt derivatives from federal trading oversight if it occurs outside the United States. A bipartisan group of lawmakers supported the carve-out on a 301-124 vote. Supporters say the exemption is necessary to allow U.S. firms to remain competitive in foreign markets. But opponents say the regulations outside the U.S. tend to be weaker and the exemption would put the broader financial system at risk. Derivatives are investments whose value is based on some other investment, such as oil and currencies. The market was largely unregulated before the 2008 financial crisis and played a major role in the financial meltdown. The legislation's prospects in the Senate are uncertain.

Richard Davies Business Correspondent ABC News Radio Twitter: daviesabc

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