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BOND MARKET COLLAPSE
Mortgage rates have surged to roughly 7.5% while long-term Treasury yields are near their highest levels in more than 20 years. Because bond prices and yields move in opposite directions, rising yields mean investors are demanding significantly higher returns to lend money to the government. That matters because Treasury yields effectively set the baseline for mortgages, corporate debt, stocks, real estate, and almost every other asset.
INFLATION AND OIL ARE PUSHING RATES HIGHER
Inflation remains elevated while oil has moved back above $100 per barrel. At the same time, negotiations surrounding the Strait of Hormuz have broken down, creating the possibility of even higher energy prices. If oil stays elevated, inflation could remain stubborn, forcing the Federal Reserve to keep rates higher or potentially raise them further.
THE GOVERNMENT DEBT PROBLEM
The United States is running roughly $2 trillion annual deficits while constantly issuing new Treasury bonds to finance spending. The problem is that this new supply is hitting the market at the same time investors are demanding higher yields. Higher borrowing costs then increase government interest expense, which contributes to larger deficits and even more borrowing.
HOUSING DEMAND IS BREAKING DOWN
Higher mortgage rates are hitting transactions before prices. Mortgage applications have fallen toward levels not seen since the early 1990s, while Redfin reports 58% more sellers than buyers. In markets including Las Vegas, Miami, Houston, Orlando, and Nashville, there are more than two sellers for every buyer. Builders and sellers are increasingly using price cuts and concessions to move inventory.
HOME PRICES COULD FACE MORE PRESSURE
National home prices are still slightly higher than a year ago, but after adjusting for inflation, real prices are already declining. If mortgage rates stay above 7%, affordability becomes increasingly difficult. At current rates, the median home would need to fall roughly 14%, or about $62,000, to produce the same monthly payment buyers could have received earlier in the year.
THE DEBT SPIRAL
US national debt has crossed $40 trillion, and interest expense has already exceeded $1 trillion this fiscal year. Much of the debt was originally issued at lower rates, meaning refinancing it at today’s yields gradually increases the government’s interest burden. Every additional percentage point of borrowing cost on debt held by the public eventually represents hundreds of billions of dollars in additional annual interest.
BONDS ARE NOW COMPETING WITH STOCKS
Long-duration Treasury bonds have suffered enormous price declines, with TLT more than 50% below its 2020 peak. Meanwhile, yields have risen enough that Treasuries can now offer returns comparable to the S&P 500’s earnings yield. That gives investors less incentive to accept stock-market risk unless expected returns are substantially higher.
BONDS ARE ALSO COMPETING WITH RENTAL PROPERTY
Treasury yields have climbed to roughly the same level as rental-property rates. An investor can potentially earn similar income from government bonds without tenants, repairs, property management, or many of the risks involved with owning real estate. If rates remain this high, rental-property prices may eventually need to fall for expected returns to become competitive again.
WHAT HAPPENS NEXT
If oil falls, inflation cools, and the Fed avoids additional tightening, yields and mortgage rates could decline. If oil remains above $100, inflation stays elevated, and mortgage rates approach 8%, housing demand would face more pressure. Unlike 2008, however, most homeowners have significant equity and low fixed-rate mortgages, making a slow inflation-adjusted decline or prolonged stagnation more plausible than widespread forced selling. Markets with heavy construction, excess inventory, and investor ownership would likely feel the pressure first.
Timestamps:
00:00:00 – Intro | Mortgage Rates Skyrocket
00:01:21 – Treasury Prices Rise
00:03:57 – The Bond Collapse
00:06:08 – How To Prepare
00:07:48 – Home Prices
00:10:08 – The Debt Spiral
00:12:48 – What Happens Next
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