The 10 Year Treasury Yield is near 4.7%, and X is lit up with predictions of higher rates to come and the demise of the housing market.
Rates may in fact edge higher, but I still think they’ll ultimately fall and that we could actually see deflation and much lower rates – and I will explain why below.
But I want to share some interesting factoids first.
Interesting Factoid #1 – Treasury Yield/Mortgage Rate Spread Tighter: We last saw 10 Year Yields at this level in April of last year, but the average mortgage rate was 40 basis points (4/10%) higher then. In other words, rates would be 40 basis points higher today if the “spread” between mortgage rates and Treasury Yields had not tightened so much.
Interesting Factoid #2 – Mortgage Rate History: The other times we saw rates this high were in April of last year, October of 2023, October of 2022, and 2001. Mortgage rates were HIGHER for almost all of 1970 – 2001, reminding us once again of how spoiled we are. What’s really interesting though is that the 10 Year Treasury Yield was often higher than it is today in the period from 2001 – 2007, but mortgage rates were always much lower. This is again because the mortgage/Treasury spread was much tighter.
HERE is a 30-year mortgage rate chart, and HERE is a 10 Year Treasury chart.
Here’s What’s Really Interesting: China’s Collapse and Potential to Spread Deflation to the U.S.
This Kobeissi Letter thread on X is fascinating and I highly recommend reading it. It starts with this: “This has NEVER happened in recent history: In a sudden collapse, 30-year interest rates are now LOWER in China than Japan…”
TLDR: China is facing a massive deflationary collapse because of its aging population and because of a real estate collapse that has wiped out $18 trillion of wealth. This is WORSE than the loss of real estate wealth in the U.S. in 2008, and it is very similar to what Japan faced in 1990 – and Japan has yet to recover.
Interestingly too, China is facing a deflation crisis while the U.S. is ostensibly facing an inflation crisis.
China is facing a deflation crisis, despite China’s willingness to “print money” via stimulus, because (1) its banks do not want to lend money, and that is how most new money is created; and (2) its aging and/or cash strapped population is not demanding goods, services, and real estate at the same levels that it was.
Other countries are facing similar deflationary issues – and this could spread to the U.S. (Jeff Snider in fact still insists that it will).
Why Deflation Can Spread to the U.S. (And Bring Rates Much Lower)
1. Globally Synchronized Economies: Snider reminds us again that the world’s economies are too intertwined to not influence each other; what happens overseas inevitably spreads to the U.S., per Snider, and vice versa.
2. Cheaper Exports: Weaker overseas economies and currencies mean that their exports to the U.S. will be that much cheaper – both because our currency is stronger and because struggling overseas companies will lower prices to boost exports to stay alive (like we’re seeing Chinese companies do now).
3. Reduced Foreign Demand: The Chinese have been major buyers of luxury goods, real estate, fine art, and many other items outside of China – and that has been propping up or inflating prices (real estate in Canada has really been impacted, for example). Now that the Chinese economy is struggling though, much of that demand will dry up.
4. Currency Crises: When a country’s currency becomes too weak relative to the U.S. dollar, it can suffer from a currency crisis (where it is unable to import goods, service its debts, and/or just pay bills). These crises are threats to economies, to individuals, and to the world economy as a whole for a variety of reasons. As a result, they can cause rates to fall here in the U.S., as investors “fly to the safety of the bonds” and/or expect lower growth overall in general as a result of the currency crisis – depending on the size or severity of the crisis.
For now, we remain in Brent Johnson’s higher for longer – until a crisis hits – rate paradigm. But a crisis seems more and more likely (and this does not even account for the similarities between today’s stock market and the 1920s stock market).
One more factoid: We had our busiest November and December in years, despite high rates – so many buyers have clearly given up on waiting for rates to fall – a reminder that there is still ample business out there no matter where rates are.
