Long-term government bond yields are on the rise yet again:
On the one hand, 30 year Treasury yields are now the highest they have been since 2007, right before the onset of the Great Financial Crisis. Long bonds yielded around 1% in at the Covid crash nadir so they’ve come up a lot this decade.
On the other hand, the average yield in the past 50 years is 6.2%. From 1977 through the summer of 2001, yields on long bonds were never lower than they are today.
If you showed the current yield curve to students in an Econ 101 class, they would tell you it looks normal:
It’s not so much the current level of rates that has macro people worried.
It’s the speed of the rise in rates combined with the stickiness of inflation, the size of government debt, the endless deficits and seemingly unwillingness of anyone in our government to do anything about it.
I’m not so worried about a government debt crisis. Maybe I’ll regret this stance in the future but I simply don’t see what the alternative is to U.S. Treasuries or the dollar.
And it’s not like the government funds itself exclusively on long-term debt. Look at the breakdown by maturity from the pseudonymous Jesse Livermore:
Unless there’s a buyer’s strike on T-bills, we can always fund the government on short-term paper.
This could become a problem at some point but my bigger concern it what the rise in long-term yields means for the housing market.
Mortgage rates are closing in on 7% again:
Mortgage rates first went above 6% in the fall of 2022. A lot of people assumed those levels would be short-lived.
Nope.
We’ve been above 6% ever since. Potential homebuyers have been waiting and waiting for some relief.
Now, some would tell you mortgage rates at 6% are normal based on history. And they’d be right. The average 30 year mortgage rate since the early-1970s is 7% and change.
The problem this decade is the speed of the move up in both prices and rates.
Housing prices rose 50% in a few years. Mortgage rates more than doubled in the blink of an eye. There was no time to prepare for either move.
And now many people can’t move.
Sure, there is some activity going on but housing is one of the most important segments of the economy.
High mortgage rates and high prices are restricting activity in this space.
That’s why housing remains the biggest risk when it comes to rising bond yields.
Short of a recession, it doesn’t seem like any relief is on the way either.
Further Reading:
How to Fix the Housing Market
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