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It’s insane to me that you could buy a 10 year treasury around 1980 that paid 17%. That’s more than double the long term stock market return, and it’s (basical

It’s insane to me that you could buy a 10 year treasury around 1980 that paid 17%. That’s more than double the long term stock market return, and it’s (basically) risk free.

bkohlmann 7y ago
Inflation was nearly that high, so while the nominal rate was high, in real terms it was more in line with historical returns. Mortgage rates were often in double digits too.
gruez 7y ago
But during that time inflation was in the double digits, and peaked at 14.8%. There was a real risk that inflation would go to 20%, which would wipe you out.
- deleted 7y ago
  [deleted]
- AnimalMuppet 7y ago
  Worse: You got 17%, but inflation was 14%, and you had to pay taxes on the 17%. So even at 17%, you were still losing money.
chiph 7y ago
The 1973 oil crisis (and paying for the Vietnam War, etc) had kicked off a cycle of inflation that didn't really end until after the early 1980's when Paul Volcker (Federal Reserve Chairman) shrunk the money supply and raised interest rates. The prime rate hit 21% in 1982. Dad was getting phone calls just begging him to refinance his 3.5% mortgage to current rates. "We have a low-low 18.5%!" Nope.
- SilasX 7y ago
  Oh, man, he must have been kissing the ground to have locked in that mortgage rate before the inflation and high rates kicked in!
  - chiph 7y ago
    Well, it was 1966 and that's what you got back then. :) He would record every payment on the booklet you got with the mortgage that had the amortization schedule printed in it.
  - Redoubts 7y ago
    It’s amazing rates lock in for 30 years. Are banks still stuck in the 80s too?
    - lumost 7y ago
      Variable interest rates were a thing in the early-mid oughts. It didn't end well.
      - mruts 7y ago
        Variable rate mortgages still are a thing. And it's not like there's anything really wrong with them. You are getting a better rate (compared to the newly issued fixed rates), but also getting some rate exposure over the duration of your mortgage. This exposure could help you, or hurt you, but I would hardly call it a bad thing. The problem is that most people don't understand these things and are stupid, and decide to buy a house and sign all the paperwork without reading it.
        toast0 7y ago
        > This exposure could help you, or hurt you, but I would hardly call it a bad thing. The problem is the amount it can help you and the amount it can hurt you are disproportionate; if the rates fall enough to significantly help you, you could likely have a similar reduction by refinancing a fixed rate mortgage. But, if rates go up, you can't refinance to get a better rate, and you may have trouble selling as you may have planned, because higher interest rates put downward pressure on prices. For me, it seemed like the risk was not worth the reward; especially given I was borrowing in 2009, and rates had significantly more room to go up than to go down. In the 1980s 20+% interest rate climate, I may have chosen differently.
- b_tterc_p 7y ago
  I’m curious what they said in the phone calls? I’m not sure what they could possibly do to sound compelling apart from perhaps just hoping your dad was aggressively financially illiterate?
  - onlyrealcuzzo 7y ago
    Hello, uh, Mr. Doopler, I see that your current rate is 3.5% on your house. Did you know that at Bank Super Cool we're offering rates as high as 29.7%, and as you know, bigger is always better. PLUS if you refinance today, we're giving away FREE POPTARTS! Whaddya say, Mr. Doopler?
    - user5994461 7y ago
      Not sure why you're getting downvoted. They absolutely do that. If you were in person, they would even show you a great chart with their returns and the normal returns so you can see how how much better than the average they are!
  - coldtea 7y ago
    Obviously in exchange they would shave off some part of it?
  - _ah 7y ago
    They probably offered to lower his payments. Sure, the mortgage that would be paid off in 5 years now has another 20 years of payments left, but hey lower monthly payments!
  - toast0 7y ago
    Lower your interest rate mortgage calls are very poorly targeted. The companies that do this get lists of people with mortgages, which is easy because mortgages need to be publicly recorded to be effective, and call all of those people without any attempt to narrow the field; or maybe they just call everyone they can. They usually call and offer "new lower rates" when the rates have gone down in the last few months, but they probably don't work very hard to estimate the original rate (it's not public record, but you could probably make a good guess based on the lender and the date it was recorded). I had a mortgage originated in 2009, and then rate adjusted down several times to something in the 3.x range -- and would get calls and mailers promising "historically low" rates of 4.x; which I always found very amusing.
- beefman 7y ago
  If a precipitous rise in oil prices caused inflation, why did Paul Volcker cure it, and not the equally-precipitous fall in oil prices that occurred simultaneously with his attempt? That is, second attempt -- his first attempt, when oil prices were still high, didn't work.
- deleted 7y ago
  [deleted]
deleted 7y ago
[deleted]
chrisseaton 7y ago
It's only 'risk free' in hindsight. Nobody knew what inflation would be and people risked losing value.
- b_tterc_p 7y ago
  I may be wrong but I think when you say risk free you just mean there’s no risk of it not paying out. Inflation is a separate potential threat, for which there are inflation protected treasury assets?
  - chrisseaton 7y ago
    The risk is that it pays out, but what it pays out is less value than you paid in, due to inflation. It's effectively less money you're getting out, even though the number is the same. Sometimes inflation is so high that you would effectively get nothing back. You can't call that 'risk free.' You also risk that the bond is not honoured - that's a really low risk for the US Government, but it's also not 'risk free.'
  - kgwgk 7y ago
    Yes, "risk free" has a technical meaning which doesn't include inflation risk. But it may be misleading when used in a non-technical context. Even if we assume for the sake of the argument that there is no default risk at all in government bonds you have risks linked to inflation and changes in interest rates (they affect the value of your investment before maturity and your ability to reinvest the coupons received according to the initial expectations).
- egdod 7y ago
  “Risk free” refers to default risk, not the risk that you could have gotten a better return elsewhere.
  - deleted 7y ago
    [deleted]
turk73 7y ago
In the early '90s you could buy CDs in the 10 and 12% range! I had a passbook savings account that paid 5%. I manage a pretty decent sized portfolio and have given up on bond funds. They're all screwed up because of the inversion. For the past 24 months all non-equity capital has been in shorter duration CDs, a money market fund that was until recently paying about 2.4%, and some individual corporate and muni bonds that I bought in the secondary market. A lot of lower rated bonds still have decent coupons and I haven't had any default. I assume these bonds arrived on the market because some pension fund had to dump them when the rating dropped. I'm okay with AA, A, BBB because after 2008/9 I realize pretty much that bonds are all unsafe junk, too, and provided very little backstop to my portfolio when the crash came. Money Markets nearly broke the buck back then, actually some did. Thus, the point of having bonds in a portfolio is no longer valid, all the asset allocation books need to be rewritten. I currently own a lot of student loan debt, auto notes, corporate and school district notes, etc. It's still diversified, but they are all risk assets.
astura 7y ago
The inflation rate in 1980 was 12.5%.
kgwgk 7y ago
As other have mentioned, it's not "risk free" in a way that makes it "insane". You could buy a 10-year bond paying 8% in 1970. That's a high yield by 21st-century standards but it performed quite poorly [1]: when you got your principal back ten years later it was worth less than half as much due to inflation (and not even by reinvesting the interests received would you break even). [1] not worse than stocks, though
wutbrodo 7y ago
> That’s more than double the long term stock market return, and it’s (basically) risk free. You're comparing nominal and real numbers here. The nominal rate was more than double the long term _real_ stock market return, but the corresponding real rate was 4.5%, as the inflation rate was 13.5% in 1980. That's a more accurate and much less eye-popping number.
rolltiide 7y ago
It didn't seem risk free at the time.
e40 7y ago
My parents had a mortgage in the 80's at 18%. Yes, those were crazy times.

It’s insane to me that you could buy a 10 year treasury around 1980 that paid 17%. That’s more than double the long term stock market return, and it’s (basically) risk free.

bkohlmann 7y ago

Inflation was nearly that high, so while the nominal rate was high, in real terms it was more in line with historical returns. Mortgage rates were often in double digits too.

gruez 7y ago

But during that time inflation was in the double digits, and peaked at 14.8%. There was a real risk that inflation would go to 20%, which would wipe you out.

deleted 7y ago
[deleted]
AnimalMuppet 7y ago
Worse: You got 17%, but inflation was 14%, and you had to pay taxes on the 17%. So even at 17%, you were still losing money.

chiph 7y ago

The 1973 oil crisis (and paying for the Vietnam War, etc) had kicked off a cycle of inflation that didn't really end until after the early 1980's when Paul Volcker (Federal Reserve Chairman) shrunk the money supply and raised interest rates. The prime rate hit 21% in 1982. Dad was getting phone calls just begging him to refinance his 3.5% mortgage to current rates. "We have a low-low 18.5%!" Nope.

SilasX 7y ago
Oh, man, he must have been kissing the ground to have locked in that mortgage rate before the inflation and high rates kicked in!
- chiph 7y ago
  Well, it was 1966 and that's what you got back then. :) He would record every payment on the booklet you got with the mortgage that had the amortization schedule printed in it.
- Redoubts 7y ago
  It’s amazing rates lock in for 30 years. Are banks still stuck in the 80s too?
  - lumost 7y ago
    Variable interest rates were a thing in the early-mid oughts. It didn't end well.
    - mruts 7y ago
      Variable rate mortgages still are a thing. And it's not like there's anything really wrong with them. You are getting a better rate (compared to the newly issued fixed rates), but also getting some rate exposure over the duration of your mortgage. This exposure could help you, or hurt you, but I would hardly call it a bad thing. The problem is that most people don't understand these things and are stupid, and decide to buy a house and sign all the paperwork without reading it.
      - toast0 7y ago
        > This exposure could help you, or hurt you, but I would hardly call it a bad thing. The problem is the amount it can help you and the amount it can hurt you are disproportionate; if the rates fall enough to significantly help you, you could likely have a similar reduction by refinancing a fixed rate mortgage. But, if rates go up, you can't refinance to get a better rate, and you may have trouble selling as you may have planned, because higher interest rates put downward pressure on prices. For me, it seemed like the risk was not worth the reward; especially given I was borrowing in 2009, and rates had significantly more room to go up than to go down. In the 1980s 20+% interest rate climate, I may have chosen differently.
b_tterc_p 7y ago
I’m curious what they said in the phone calls? I’m not sure what they could possibly do to sound compelling apart from perhaps just hoping your dad was aggressively financially illiterate?
- onlyrealcuzzo 7y ago
  Hello, uh, Mr. Doopler, I see that your current rate is 3.5% on your house. Did you know that at Bank Super Cool we're offering rates as high as 29.7%, and as you know, bigger is always better. PLUS if you refinance today, we're giving away FREE POPTARTS! Whaddya say, Mr. Doopler?
  - user5994461 7y ago
    Not sure why you're getting downvoted. They absolutely do that. If you were in person, they would even show you a great chart with their returns and the normal returns so you can see how how much better than the average they are!
- coldtea 7y ago
  Obviously in exchange they would shave off some part of it?
- _ah 7y ago
  They probably offered to lower his payments. Sure, the mortgage that would be paid off in 5 years now has another 20 years of payments left, but hey lower monthly payments!
- toast0 7y ago
  Lower your interest rate mortgage calls are very poorly targeted. The companies that do this get lists of people with mortgages, which is easy because mortgages need to be publicly recorded to be effective, and call all of those people without any attempt to narrow the field; or maybe they just call everyone they can. They usually call and offer "new lower rates" when the rates have gone down in the last few months, but they probably don't work very hard to estimate the original rate (it's not public record, but you could probably make a good guess based on the lender and the date it was recorded). I had a mortgage originated in 2009, and then rate adjusted down several times to something in the 3.x range -- and would get calls and mailers promising "historically low" rates of 4.x; which I always found very amusing.
beefman 7y ago
If a precipitous rise in oil prices caused inflation, why did Paul Volcker cure it, and not the equally-precipitous fall in oil prices that occurred simultaneously with his attempt? That is, second attempt -- his first attempt, when oil prices were still high, didn't work.
deleted 7y ago
[deleted]

deleted 7y ago

[deleted]

chrisseaton 7y ago

It's only 'risk free' in hindsight. Nobody knew what inflation would be and people risked losing value.

b_tterc_p 7y ago
I may be wrong but I think when you say risk free you just mean there’s no risk of it not paying out. Inflation is a separate potential threat, for which there are inflation protected treasury assets?
- chrisseaton 7y ago
  The risk is that it pays out, but what it pays out is less value than you paid in, due to inflation. It's effectively less money you're getting out, even though the number is the same. Sometimes inflation is so high that you would effectively get nothing back. You can't call that 'risk free.' You also risk that the bond is not honoured - that's a really low risk for the US Government, but it's also not 'risk free.'
- kgwgk 7y ago
  Yes, "risk free" has a technical meaning which doesn't include inflation risk. But it may be misleading when used in a non-technical context. Even if we assume for the sake of the argument that there is no default risk at all in government bonds you have risks linked to inflation and changes in interest rates (they affect the value of your investment before maturity and your ability to reinvest the coupons received according to the initial expectations).
egdod 7y ago
“Risk free” refers to default risk, not the risk that you could have gotten a better return elsewhere.
- deleted 7y ago
  [deleted]

turk73 7y ago

In the early '90s you could buy CDs in the 10 and 12% range! I had a passbook savings account that paid 5%. I manage a pretty decent sized portfolio and have given up on bond funds. They're all screwed up because of the inversion. For the past 24 months all non-equity capital has been in shorter duration CDs, a money market fund that was until recently paying about 2.4%, and some individual corporate and muni bonds that I bought in the secondary market. A lot of lower rated bonds still have decent coupons and I haven't had any default. I assume these bonds arrived on the market because some pension fund had to dump them when the rating dropped. I'm okay with AA, A, BBB because after 2008/9 I realize pretty much that bonds are all unsafe junk, too, and provided very little backstop to my portfolio when the crash came. Money Markets nearly broke the buck back then, actually some did. Thus, the point of having bonds in a portfolio is no longer valid, all the asset allocation books need to be rewritten. I currently own a lot of student loan debt, auto notes, corporate and school district notes, etc. It's still diversified, but they are all risk assets.

astura 7y ago

The inflation rate in 1980 was 12.5%.

kgwgk 7y ago

As other have mentioned, it's not "risk free" in a way that makes it "insane". You could buy a 10-year bond paying 8% in 1970. That's a high yield by 21st-century standards but it performed quite poorly [1]: when you got your principal back ten years later it was worth less than half as much due to inflation (and not even by reinvesting the interests received would you break even). [1] not worse than stocks, though

wutbrodo 7y ago

> That’s more than double the long term stock market return, and it’s (basically) risk free. You're comparing nominal and real numbers here. The nominal rate was more than double the long term _real_ stock market return, but the corresponding real rate was 4.5%, as the inflation rate was 13.5% in 1980. That's a more accurate and much less eye-popping number.

rolltiide 7y ago

It didn't seem risk free at the time.

e40 7y ago

My parents had a mortgage in the 80's at 18%. Yes, those were crazy times.