WOW – Part III! I have never seen rates spike so quickly like this, and I am not alone.
The last time rates spiked like this was in 1982 and in 2001 – when we faced similar uncertainty in the financial markets.
This morning, I was able to watch rates climb in real time, and I took a screenshot (below) of the 10-Year Treasury Chart over the last year for today’s blog so readers can see how sharp of a spike it is.
Please appreciate this, as it is a once-in-a-lifetime event like seeing Halley’s comet or a solar eclipse. The question is – will rates fall, and if so, when?
There are several theories as to why rates are spiking so much – particularly when inflation is cooling (the Producer Price Index came in much cooler than expected – and normally such a report would push rates way down).
- The World Is Abandoning American Assets/The Gig Is Up. This is the Peter Schiff theory. Peter deplores Trump’s tariffs and he thinks the world has finally called America’s bluff when it comes to our ability to stop runaway spending and service our debts without printing. And, as a result, investors are selling off both American stocks and bonds. Schiff’s been telling us the sky is falling every day now for 20 years now, so I give him less weight.
- America Needs Trade Deficits To Foster Bond Buyers. This is a theory espoused by two analysts on CNBC today. With less trade (due to massive tariffs), other countries will not run trade surpluses with America – and it is those surpluses that generate demand for U.S. Treasuries (because countries invest those surplus dollars in Treasuries). As a quick reminder, a country has a trade surplus with America when it sells more stuff to America than America sells to it.
- Tariffs Are Inflationary. The CNBC analysts above cited this as another reason why rates are spiking, as bond investors demand higher yields when inflation is on the horizon. But, many analysts believe tariffs will not be inflationary, largely because it is money supply changes that foster inflation and tariffs do not impact the money supply.
- Forced Selling/Basis Trade Unwind. This is the theory I have been giving the most weight to over the last several days in my blogs. HERE is a great video by Lance Roberts that explains the infamous “Basis Trade” that is crashing the markets. It is the unwinding of the basis trade that is causing mass selling of U.S. Treasuries, and this is why Lance Roberts and Brent Johnson think yields/rates are spiking so much. Roberts thinks that the Fed may even step in to bail out the hedge funds (like they did in 2019 and 2020) because the risk to the financial markets is so severe.
So, how long the current rate increase will last depends on which theory above you give the most weight to – and also on what the Fed and President Trump do. If Trump gives up on tariffs, rates could fall (but they could also go up on renewed growth prospects). And if the Fed bails out hedge funds and stops the forced selling, rates will likely fall. If Trump and the Fed do nothing, and you give the most weight to the theories #1, #2, or #3 above, we could see rates continue to climb for some time.
I, however, still give the most weight to theory #4, as that is the one espoused by both Lance Roberts and Brent Johnson, and they have been very accurate with their analyses over the last five years – particularly with respect to recession and stock market calls.
The likes of Barry Habib, Lacy Hunt, and Larry Fink think we’re in a recession now, and that rates will inevitably fall because of the recession. But again, the question is when.
Brent Johnson implied today that once all of the basis trades get unwound, the dollar will rebound, and we’ll get back to normal.
It may take a few weeks for the unwinding to take place, so I would not hold off on locking in a rate for a purchase in contract (Barry Habib is recommending locking as I type).
But I would also still not give up on lower rates down the road.
NOTE: Rates still remain about 1/4% lower than where they were in January – so all is not lost.
