Economics News Release - Higher US interest rates: Why a little means a lot

Economics News Release - Higher US interest rates: Why a little
means a lot
US overnight rates may be at historic low, but household vulnerability to
rising rates is at historic high 


TORONTO, June 8  /PRNewswire-FirstCall/ -- Even a modest rise in US interest
rates in the next 12 to 24 months by the US Federal Reserve could result in
substantial vulnerability for US households, according to CIBC World Markets'
Monthly Indicators Report for June.

CIBC World Markets' senior economists Benjamin Tal and Avery Shenfeld, in their
report, say that US consumers are "leveraged to the hilt" in ways not seen in
the post war era. "As a result, despite extremely low interest rates,
households are more stretched today than they were at the start of any
tightening cycle in the past two decades," say Tal and Shenfeld.

The CIBC World Markets economists note that not only are Americans carrying a
lot of debt but much more of it will be exposed when rates rises. As of April a
dazzling 50 percent of new mortgages outstanding were Adjustable Rate
Mortgages. As a result almost one quarter of total household debt would be
affected instantly by higher rates, more than 70 percent higher than the
exposure rate seen in 1994. Furthermore, many Americans are living on the "edge
of the debt precipice" and are therefore extremely vulnerable to falling in to
default as a result of higher rates.

"The decline in quality of debt, its higher variable rate share, and its heavy
load relative to incomes, will mean that even a modest increase in interest
rates will lead to a disproportionately large increase in defaults and
write-offs and rates, conclude Tal and Shenfeld. "If history is a guide, banks
will try to staunch the bleeding by limiting credit lines and tightening
mortgage standards, a recipe for slower spending." The surprise will be how
little it takes from the fed in that context to achieve any desire cooling in
the US economy.

A copy of CIBC World Markets' Monthly Indicators Report is available at
http://www.cibcwm.com/research.

CIBC World Markets is a full service corporate and investment bank throughout
North America, with operations in Asia, Europe and Australia, and serving more
than 8,000 corporate, government and institutional clients. CIBC World Markets'
parent company is CIBC, one of North America's first and largest financial
institutions with offices in 18 countries, including the world's major
financial centers. A publicly traded financial services company, CIBC has
assets of US$210.1 billion and a market capitalization of almost US$16.2
billion. 

DATASOURCE: CIBC World Markets



CONTACT: Benjamin Tal, Senior Economist, CIBC World

Markets at [phone], ; Avery Shenfeld, Senior

Economist at [phone], , or Rod Cumming, Senior

Manager, Marketing and Communications, CIBC World Markets at [phone] or

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