4 ms·

I don't think rates are going to go up like they came down, maybe ever again unless there's some kind of bretton woods reset. This is because of maths and the

I don't think rates are going to go up like they came down, maybe ever again unless there's some kind of bretton woods reset. This is because of maths and the inverse effects of downward and upward shifts. - If you borrow $100 at 5% your interest is $5pa, which matches your discretionary repayment ability. - Rates drop to 3% and you can afford to borrow $167 at 3% for the same $5pa. This is a 2% or 40% of total drop. - New buyer buys in at cost of $167. - To make it somewhat realistic lets say inflation comes along and income rises, now you have $6pa repayment ability. - With a larger $167 loan, your $6 repayment can afford a rate rise to only 3.55%, this is a .55% rise or 18% total increase. . So while the rates dropped 2%, a rise of more than .5% bankrupts all the new buyers. The government is sensitive to this because many people just bought together at the new prices and low rates, and it becomes untenable when large amount of the population lose their homes at once. The same dynamic applies to business loans, government balance sheets. US is an outlier with 30 year fixed loans, the rest of the world basically does loans on variable rates or fixed for maybe 5 years a time.

adam_arthur 5y ago
There is more resistance to the upside, for sure. But the free market sets the long duration interest rate. If core inflation persists at 5%, rates will surely rise to compensate. They are mostly held low right now due to belief that CPI spike is transitory. You're right that once rates rise sufficiently, it creates recession risk, which then puts downward pressure on rates. But we can likely get to 3% on the 10y and 5% mortgages before hitting that ceiling. Keep in mind how sharply rates rose in the 70s. Though at the time debt burdens were not very high, for sure. But persistently high inflation will lead to a similar effect. We are seeing strong signs of a wage price spiral starting to form in the data

adam_arthur 5y ago

There is more resistance to the upside, for sure. But the free market sets the long duration interest rate. If core inflation persists at 5%, rates will surely rise to compensate. They are mostly held low right now due to belief that CPI spike is transitory. You're right that once rates rise sufficiently, it creates recession risk, which then puts downward pressure on rates. But we can likely get to 3% on the 10y and 5% mortgages before hitting that ceiling. Keep in mind how sharply rates rose in the 70s. Though at the time debt burdens were not very high, for sure. But persistently high inflation will lead to a similar effect. We are seeing strong signs of a wage price spiral starting to form in the data