US Treasury yields rose last week despite a relatively tame CPI report. Mortgage rates rose as well. What’s going on?
30-Year Mortgage Chart Notes
- On Friday, August 11, 2023, mortgage rates jumped to 7.19 percent and approach the October 20, 2022 high of 7.37 percent as noted by Mortgage News Daily.
- The 7.37 percent rate was the highest since October of 2000, nearly 23 years ago.
Ominous Chart Technically
Technically speaking, the chart is ominous. Rising triangle formations tend to break higher.
That’s certainly not a guarantee, or even close. But it fits in with US treasury action in response to CPI data.
US Treasury Yields Since 1998
Since 1998 there have been three major inversions where short-term yields soared above long-term yields across the board.
Currently we are in one of the steepest inversion in history with the 3-month yield at 5.54 percent and the 10-year yield at 4.16 percent.
But it’s the recent action that is more telling especially vs the CPI.
US Treasury Yields Since 2022
CPI Year-Over-Year
Year-over-year the CPI peaked at 9.1 percent in June of 2022. Since then, it has plunged to 3.2 percent.
For the move, the 10-year treasury yield slid to 3.54 percent in April of 2023. Mortgage rates also declined, leading the way, in fact.
30 year Fixed Mortgage Rates Detail
What’s the Message?
- Another uptick in inflation is on the way.
- The Fed is not done hiking.
- The goldilocks view by the Fed any widely touted in mainstream media isn’t going to happen.
Take your pick from those choices and add any other views you like.
Meanwhile, the already crippled housing market is sure to take another hit transaction-wise.
CPI Rises 0.2 Percent, Shelter Again Accounts for Most of the Increase
On August 10, I noted CPI Rises 0.2 Percent, Shelter Again Accounts for Most of the Increase
For the 18th straight month, the price of shelter has risen at least 0.4 percent. For a year, analysts have predicted not just a slowing pace of increases, but falling prices. They have been wrong.
Producer Price Index Rises 0.3 Percent Led by a 0.5% jump in Services
On Friday, I noted Producer Price Index Rises 0.3 Percent Led by a 0.5% jump in Services
I think it was the PPI that spooked the bond market. The index for crude petroleum rose 8.4 percent in July.
That will spill over into gasoline prices. Unless the price of shelter stabilizes, the August CPI report is going to come in on the hot side.
Does Fed Policy Help?
It’s debatable if rate hikes will do much for shelter, at least the way the BLS and Fed view things, because home prices are not directly in the CPI.
Higher rates will slow the pace of new construction, and its finished construction that will add to supply and possibly pressure rent prices.
The price of a new leases are falling because of the added supply, but existing leases are stubborn. Meanwhile, landlords have every reason and incentive to keep hiking rents and have done so, despite reported claims to the contrary for months on end.
The supply of existing homes is extremely tight because people do not want to trade a a 3.0 percent mortgage for a 7.0 percent mortgage. And potentially millions of people want to buy a new home but cannot because they cannot afford these high interest payments.
The Fed created this housing mess by not factoring in home prices into its inflation model.
Like homeowners who want to move but can’t, the Fed is also trapped into a problem of its own making. The Fed wants to reduce demand, and has done so, but simultaneously, the Fed is reducing supply of new houses. The latter acts to firm rent prices.
I was wondering why mortgage backed security ETFs like VMBS only yield 3 or 3.5%
The longer term trend is, rates will go higher and higher, all the way up until Federal debt is defaulted on formally, or the latest gullible-moron-bastion of 2% CPI “inflation” “has to be” put aside. “Temporarily”, of course… Since, after all special snowflakes and everythiiiing being diiiiferent is always the only permanent refuge of the truly unintelligent and economically illiterate.
The productive universe, have long since gotten tired of dragging the US and Europe along; despite neither of them contributing anything at all in return. Institutional inertia, of all major institutions facilitating trade, built up over two centuries pre 1971, is the only reason they aren’t all Argentina, routed around and forgotten about, full stop, already.
Chances are the “BRIC” or whatever their pseudo “currency” will eventually be named, won’t be all that as far as “gold backed” is concerned. But even if it is not, as long as China is sufficiently invested, it will still be a very viable place to park trade reserves, since pretty much all trade, for everyone, is with Chinese entities these days. After all, it’s not like anyone needs much of anything America has to offer anymore. And, because “we NEED to buy from China” extends to all oil producers as well, they aren’t likely to object to being pad in what Chine preferentially accepts, either.
Don’t underestimate the effect the somewhat coincidental triality:
-“everyone needs reserves which has minimal currency risk wrt buying from China,”
-“The largest buyer of Chinese goods have historically been the US, so China has made sure to keep that exchange rate fairly steady”
-“China has been unusually unwilling to open up it’s own currency market”
has had in perpetuating dollar demand, long past the date for when trade flows left the dollar fundamentally behind.
Fundamentally, what’s propping up the dollar, it’s all nothing but one big, unsustainable cardhouse by now. And it’s a cardhouse which is allowing Americans, and more indirectly also Europeans, to lay claim to a share of the world’s total resources far, far in excess of what they anymore provide and contribute in return.
That cardhouse crumbling, is not something anyone wants to be caught on the wrong side of. 2 billion Asians going from each commanding half the real resources of what an average American commands, to twice as much, in order to reach real workforce “productivity parity”…. And that’s likely conservative…That leaves Americans in what’s technically known as one heck of a squeeze….
And like all such things, that cardhouse will crumble: At first, too slow to be noticeable. Then all at once.
Which, in and of itself, is enough to create a backdrop of ever greater reluctance to hold US denominated debt in beyond-easily dumped amounts; over and above any and all other considerations, and internal US monetary gyrations.
Thanks. Excellent rant. Way above average.
I am looking at 4-year and 5-year CD interest rates for many banks/brokerages (Barclays, Marcus, Am Ex, Capital One, Merrill, TD Ameritrade…) They haven’t really gone up for quite a while. I suppose there is quite a bit of lag there?
I hope the 4-year rate is at least 4.8% and the 5-year at least 4.6% by Feb next year.
Lending/investing by the banks is inflationary (increases the volume and turnover of new money). Lending/investing by the nonbanks is noninflationary (results in the turnover of existing money), other things equal.
See ZeroHedge’s double counting:
link to zerohedge.com
“The divergence between money-market fund assets and bank deposits remains extreme…”
I.e., the transaction’s velocity of money has increased. As Dr. Philip George puts it: “Changes in velocity have nothing to do with the speed at which money moves from hand to hand but are entirely the result of movements between demand deposits and other kinds of deposits”.
Powell doesn’t know a debit from a credit. Interest is the price of loan funds/credit. The price of money is the reciprocal of the price level.
To forestall the rise in inflation and the first incidence of disintermediation of the nonbanks (credit crunch of the residential housing market), and to thwart a recession, the 1966 Interest Rate Adjustment Act was introduced.
link to seekingalpha.com
link to seekingalpha.com
Contrary to the Keynesian economists that dominate the FED’s research staff, the NBFIs are not in competition with the DFIs. The NBFIs are the DFI’s customers. I.e., the economy is being run in reverse.
The bull market in bonds was driven by the impoundment of monetary savings in the commercial banking system beginning in 1981 (aka the DIDMCA of March 31st 1980). An increase in bank-held savings destroyed the transaction’s velocity of funds reducing AD. The reduction in AD lowered risk premia.
That has currently partially reversed. Contrary to the Keynesian economists who dominate the FED’s research staff, banks aren’t intermediaries.
It’s virtually impossible for the Central Bank or the DFIs to engage in any type of activity involving non-bank customers without an alteration in the money stock. I.e., deposits are the result of lending and not the other way around.
There is a one-for-one correspondence between demand and time deposits (as loans = deposits). As time deposits are depleted, demand deposits grow dollar-for-dollar (currency notwithstanding).
The composition of the money stock is changing. That’s what is propelling the economy, dis-savings, the conversion of time to demand deposits. I.e., the demand for money is falling, velocity rising. The proportion of TDs to DDs has fallen by 18% since C-19. And the turnover ratio for DDs is much, much, higher than TDs.
link to frbsf.org.
Like I would trust something the San Francisco Fed writes.
Thanks to the neocon war in Ukraine gasoline at the non-discount brand stations in Los Angeles is pushing $6 per gallon and probably spiking higher.
But you’re all doing the Right Thing.
’cause Climate Change.
The obvious goal is to turn us into a nation of renters. New, improved, high tech medieval feudalism.
Like the deprival of basic healthcare, the trillions of purloined money intends to control every inch and stick of real estate in the country if not the world.
This is obviously unsustainable, but the megalomania and it’s broad construct is blind and deaf to this immutable fact.
Demand is fading out. People’s lives are being put on hold.
This ‘culture’ is dying.
It’s a matter of time.
There is no army to enforce the mad whims of the cabals no matter how much destruction they might unleash.
Older, more peaceful music and mor’es will survive.
The fast departing boomers left an influence that cannot be censored or erased.
It can and must resolve down to a freedom based society that supports justice and sensible values.
Justice is a delusion of the middle classes.
The poor have none.
The rich have no need.
– Lisa Hooker
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Blackstone wants to buy at a 10% discount with a cash offer, yet retail investors are supposed to pay top dollar with a high mortgage rate.
In Boise, my daughter and her husband make $80,000 per year. That is not enough for afford a $3,000 mortgage. The Boise market is way overvalued.
Certainly a renter society, till like 40+ years old, is forming.
On a side note, what is the risk of margin buying into the options market with these interest rates, in the US. Like housing, I don’t like the margin purchasing at all and a flash crash is on the table.
sounds correct from my dealings with people. i’ve been landlording for ages. societies change. a century ago, like 40% lived on farms. now like 3%. germany has low ownership. here in nyc it’s like 25% only.
Prior to QE, 10 year real yields were mostly higher than 2%.
link to fred.stlouisfed.org
They’re only just approaching 2% now with the 10 year at 4.16%, so you can’t really make the case that treasuries are cheap. There’s going to be plenty of supply given the government’s borrowing needs and inflation isn’t likely to fall much more now. Therefore if left to find its own level, I don’t see why real yields couldn’t rise another couple of percent. Even if they began to cut rates again (which I doubt in the near term) the curve would most likely steepen. I think the only short term hope for the bond market is the prospect of another round of QE at some point, but that’s not likely anytime soon.
And Bidenomics is just getting started.
Pertaining to Housing costs, Biden and the Democrats have let in Millions of illegals, and they are taking, what’s left of any Housing. Biden and the Democrats raised taxes on LandLords making over $400k (So called tax the rich) Landlords have to pass that along to renters, to stay viable….
The Biden Tax is hurting everyone.
Be more specific. What is this federal tax that applies to owners of Real Estate rentals?
If your money is losing purchasing power, you might be better off buying that house at 7.25% interest. As the dollar loses purchasing power, that house will go up in price.
You know who this doesn’t bother? Blackstone. I get texts and phone calls 5-7 times A WEEK to buy my rental properties. Of course, they are offering prices like 50-70 grand below market, but they are cash offers.
If you have a spouse and you both work, then I would still buy a house at 7.25% because you’d rather build equity in my home than pay someone like me-the landlord. There are many people that don’t want a house for whatever reason, this I can attest.
The biggest enemy of the economy is this nonstop overspending regardless who is in office and the expenditures on the military. This cannot go on indefinately.
“ The biggest enemy of the economy is this nonstop overspending regardless who is in office and the expenditures on the military. This cannot go on indefinitely.”
I have been hearing that for 50 years now. Yet its still going on. Maybe in another 50 years it will end. The reality is you don’t know. Better to ignore it and get on with your life.
I’ve also been hearing that it can’t go on but it has gone on much longer than I ever thought it could. So when will it not be able to continue? I haven’t a clue.
Everybody ignoring it is how we got here.
What are you going to do about it? Become president and fix it? Go ahead. Be my guest. Let me know when you’re done.
No you protect yourself… why would anyone want to be president? If you want a hand shoved up your backside just pay 50 bucks to an indiscriminate persons
Lmao terrible advice.
1) The bond market cluster #1 : 2000 to 2006. Cluster #2 : 2008 to 2018.
After a break, Cluster #3 started in 2022. The 3m : a lot of resistance above.
2) SPX 3M with a cloud : There was never a real deep red flatbed since 1938/1951. There was some noise to ignore in 1982 and 2016.
3) If the 3M cloud will turn around we might get a big red flatbed starting later in the decade til the 2030’s.
4) SPX 1M with the cloud : Chikou might drop under price. Senko B, 52 month to the
left, will lose it’s 2020 lows in 11 months. Senko B will rise sharply up and flip,
unless SPX popup to 5,500.
I keep giving you the solution to a debt burdened economy and a monopolistic monetary paradigm, but no one here is smart enough or open minded enough to see it.
A Debt jubilee and a 50% Discount at retail sale every penny of which is rebated back to the retailer giving it to the consumer will benefict every individual agent and every commercial agent while rejuvenating profit making economic systems.
Until you wake up to those mathematical and temporal universe realities…keep ranting and raving and/or indulging in your self destructive cynicisms
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Lol! “Your” solution simply doesn’t matter because it isn’t going to happen. And telling people “your” solution on a blog, and then expecting it to magically happen just shows how out of touch with reality you are.
You might as well tell people you have the cure for cancer, the solution to cold fusion, and the easy and profitable way to remove Greenhouse Gasses from the atmosphere.
Maybe if you run for president and win, you can implement your “solution”.
Good luck.
Your answer exposes your terminal cynicism as mentioned in my post. No one exceeds my level of cynicism. The only difference is I refuse to give in to it. Consuly SunTsu the Japanese military strategist who said if you can convince the enemy (us) that there is no sense in trying to stop you (Finance and its monopolistic paradigm) …then you’ve won the war without even having to fight it.
The problem is ever increasing debt because the paradigm for new money is Debt Only, and the solution is strategic utilization of the new paradigm of Monetary Gifting. Start a mass movement communicating the benefits of such strategic policies and their universal benefits to all agents/individuals and hope will spring forth.
Lol! I don’t care what you think. I live in the real world; not your fantasy world. You go ahead and do your thing. I will focus on my health, wealth and happiness. You can keep focusing on crazy.
There are no so blind as those who WILL NOT SEE. Look at what a 50% Discount/Rebate at retail sale does for every individual and every commercial agent.
Steve Keen has a somewhat more sophisticated version of your proposal.
Keen’s advice is wrong. The philosophical issue boils down to the “Scorpion and the Frog” fable. The Treasury’s “overdraft privilege” ($5b of emergency borrowing at any one time of securities purchased directly from the Treasury), was discontinued for good reason.
Treasury-Federal Reserve collaboration exists in its present state, because whenever in the past the FED’s responsibilities were subordinate to the Treasury’s, this country experienced intolerable rates of inflation.
That’s what the 1951 Treasury-Reserve Accord was all about.
Powell is just incompetent:
#1 “there was a time when monetary policy aggregates were important determinants of inflation and that has not been the case for a long time.”
#2 “Inflation is not a problem for this time as near as I can figure. Right now, M2 [money supply] does not really have important implications. It is something we have to unlearn.”
#3 “the correlation between different aggregates [like] M2 and inflation is just very, very low”.
Properly initiated and implemented a 50% Discount/Rebate policy would end inflation forever…for every individual agent. Keen is right about the macro-economy he just hasn’t awakened to the need to analyze on the conceptual/paradigmatic level.
The government doesn’t want inflation to end, it makes more and more folks dependent on them.
Correction. Keen advocates a “modern debt jubilee” as a one-off while I advocate to integrate debt jubilee continuously into the economic process with a 25-50% debt jubilee at the point of loan signing at least for your permanent residence and a second residence. His carbom currency is also not a bad idea, but doesn’t have nearly as beneficial effect as my 50% Discount/Rebate at reatil sale.
All of the leading economic reformers point to the same area being the problem. but none of them are consciously aware the exact concept that policy should be alined with. Hence their policiy recommendations end up being palliatives and are easily skirted and temporary. Paradigm changes being exact solutions are historically always permanent.
And I keep telling you that if the “50% Discount/Rebate at reatil (sic) sale” is simply increased to 120% not only will sales at POS dramatically increase, but folks will leave with 20% in cash to spend at the next store.
Foolproof, or proven fool?
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Come to think of it if you spent a high enough volume of money you could just retire and never have to work again. Just spend money.
Foolproof.
“Meanwhile, the already crippled housing market is sure to take another hit transaction-wise.” Housing market is still hot and can’t get trades and if they come and give you a price WOW Just to supply and install an oak wood floor in my dining room $16,569 plus tax and installation 3 months from when I give 50% deposit.
There is no real construction downturn in BC and Alberta is even in worse shape and is asking for construction workers to come Alberta. RATES have not slowed down any construction yet.
The economy continues to muddle along. Slow growth remains the most likely scenario, barring some shock.
Inflation will remain modest for another 3 -5 months. However, if OPEC is successful in pushing oil back over $90, inflation will move up again at the end of this year and into 2024. Inflation rates are often a comparison to a year earlier. At the beginning of Nov 22, oil was $95, still higher than today. It then dropped and averaged around $77 from Dec 22 to Mar 23. From Mar 23 to Jul 23, it averaged around $72. Since July it has shot up to $83. If oil gets back to $90, those comparisons to a year earlier should look inflationary early next year.
I was at gas station and noticed the diesel premium over regular gas was only 30 cents. I checked and diesel is down 75 cents year over year. Truckers stopped trucking.
Yep. Both supply and demand for diesel and gas move up and down all the time. For a while, high diesel demand forced diesel prices far above gasoline prices. Now that is reversing (in general).
However, the supply/demand balance is not the same everywhere. A lot depends on regional refineries and their output. A refinery shutdown in one region will raise prices in that area rather quickly.
US Refineries are currently operating at 93% capacity, which is on the high side.
Refiners produce roughly 20 gallons of gasoline and 12 gallons of diesel from each 42 gallon barrel of oil. High demand for one product can end up causing a surplus of the other because refiners cannot easily alter the product mix.
Yellow bk.
thanks for passing on your expertise. very interesting. don’t stop.
Here’s hoping the shorter term T-bills ( 4-wk, 8-wk, 13-wk, 17-wk, 26-wk, 52-wk) will also continue to rise.
“What’s the Message?” The world has run out of money to meet the supply of debt?
Housing is a significant part of the economy. With interest rates this high, sales of new homes will eventually come down, slowing the economy. There is a housing shortage, but with rates this high it will be more difficult to sell new homes. Anything bought on shorter-term mortgages that were expected to be refinanced at lower interest rates will have problems with refinancing. The Fed wanted to slow the economy, and by and by will find it has succeeded.
To make the housing shortage more interesting, we are accepting into our country large number of people fleeing all sorts of bad things. In Massachusetts, all available shelters have been filled and we now even have the Lieutenant Governor calling on private citizens to take refugees into their homes.
The Massachusetts thing, I’m all for it, in spades. Couldn’t happen to a better place.
Vacationed in Bar Harbor about 10 years ago. Drove there by way of upstate NY, rural VT, NH; great part of trip. Mid-week at BH was great. Come Friday afternoon…where are all these j- offs coming from? Looked at their state license plates…’well, whaddya know?!!!,’ and all had bumper stickers with certain victorious political figure. Will never make the same mistake of going anywhere near there again.
I’m from Florida, and my youngest moved to Boston. The Mrs. and I went to visit and I felt something was fundamentally different. Then I realized there wasn’t a single Trump flag or bumper sticker anywhere.
Boo hoo.
Refugees?
Yes, refugees from justice.
The government is asking private citizens to abet transgressors b/c there’s too many.
Sorry for my non-PC view but a roommate that doesn’t speak a language I understand and is unused to indoor sanitation is not my first preference.
Bond market still coming to grips with where long term rates need to be now and for the foreseeable future.
Long rates ain’t coming back down.
The 10yr T belongs in the 4-4.5% range for the foreseeable future. Occasionally overbought to 3.75, occasionally oversold to 5. That’s it, for the foreseeable future. However this I feel is still very much a minority view.
I think one driver is the army of money managers who made a fat living the past decade merely owning Fannie & Freddie RMBS. They are still underwater, will be so for years, and have their collective heads in the sand.
How the US economy is holding together is a mystery to me. I think it is like the Titan submersible….cracks are forming until …’BOOM!’
Historical charts over past decades, going to a boom!
It’s not a mystery at all. The FY23 deficit will approach $2T. With this level of deficit spending, a recession is much less likely due to the crap ton of extra free money. I say free money because the bond market seems to be only now awaking to the possibility that Biden’s profuse spending will keep the Fed from getting core CPI back to 2% outside of a recession. There’s a point at which sustained core CPI inflation above 4% meets a stubborn labor market, wage inflation, services inflation & a unruly bond market. And, I think that’s what’s in store for the remainder of the year, continued signs of entrenched inflation that’s being caused by excessive government spending.
What’s needed is for the demand for treasuries to slowly erode over the remainder of the year. That will force yields up to a truly unsustainable level, above 5% for 10YT which would push 30YFRM up to about 8.5%. Through Q2 of FY23, the annual interest expense on the national debt has jumped to $970B. And Yellen is adding a lot of new debt in Q3 at very high rates.
So all this extra government spending, including state & local, is pushing out the arrival of a recession. It’s that simple, no mystery.
=he FY23 deficit will approach $2T. W
ABS. CORRECT ANSWER. yes just printing paper w/ watermarks on it
KUDOS !!
= US economy is holding
holding ?
about 95 mil from 260 mil adults dont work.
about 40% dont pay federal income tax ( or have zero liability)
abou half of population don’t have 1000$ for emergency expense
and on on on…
“about 40% dont pay federal income tax ( or have zero liability)”
Vs 100%, back when the US economy was still “holding..”
It could be that we are the least stinky piece of garbage in the world. So, it is relatively easy to park money here versus some other sinking ship, such as Germany or the UK.