Just when you think rates can’t go any higher… they go higher.
Many prominent analysts think they can go much higher too – all the way to 9% in some cases.
Chris Whalen is one, as he thinks we’ll see double-digit inflation because of the Iran War. Logan Mohtashami is another – and I will explain why.
SIDEBAR: INTEREST-ONLY LOANS are saving us! When volumes drop, lenders get far more aggressive with their offerings – and interest-only loans are a case in point. In “normal” times, investors (who buy our loans) demand large premiums for an interest-only option. But right now, that premium is as low as 1/8% in some cases. Interest-only for a $1 million loan can shave $900 or more off a payment – and our clients are opting for these loans often now.
Mohtashami thinks a combination of a strong labor market, strong GDP growth, inflation (and resulting Fed rate hikes), and an increasing “mortgage to 10-Year-Treasury spread” (the “spread”) could push rates much higher.
I blog often about how the “spread” was as high as 3% in 2022 and 2023 – and how that drove rates much higher – and how we were saved in recent years by the spread dropping to 2%. Welp…it’s climbing again and is now close to 2.3%.
Despite these concerns, there remain many other prominent analysts who think rates will fall late this year and next year – for many reasons.
Citi’s Andrew Hollenhorst and Veronica Clark, Nuveen’s Tony Rodriguez, Goldman’s David Mericle, Jim Bianco, George Gammon, and Jeff Snider are just a few.
Echoes Of 2008!
Gammon’s 2008 comparison is the most interesting – and it has nothing to do with a housing crash (which we will not see because we don’t have excess credit in housing or excess inventory).
What we also had in 2008 was:
(1) record high oil prices of almost $150 per barrel (compared to WTI of under $90 today);
(2) an inflation rate of 5.6% compared to about 3.4% today (both due to high energy prices); and
(3) a dollar that was surging in value – just like it is today (a surging dollar often indicates that times are tough elsewhere in the world, fostering dollar shortages as borrowers pay off dollar debt and banks lend fewer dollars; remember that most “dollars are created” by bank lending, not the Fed or the Treasury).
We were also on the cusp of a major credit crisis as a result of horrible lending practices in the housing sector. Similarly, we are on the cusp today too – but today’s revolves around the enormous “private credit” (lending by non-banks) bubble that will likely burst too.
The Fed seriously and comically considered hiking rates in the summer of 2008 because they were so concerned about inflation. Sound familiar?
Anyway – Gammon thinks the Fed’s recent hike may have been the biggest mistake in history because today is eerily similar to 2008.
We have inflation driven by an energy price shock (high oil prices), as opposed to too many dollars in the economy. And the dollar is surging in value, as mentioned above – signaling overseas economic issues.
So, Gammon (and others) think hiking rates in this environment could not only make things worse, but it would trigger a bust – that could bring rates much lower.
There are many other events that could bring rates down as well, as I mention often, such as a stock market correction, surprisingly cool labor market and/or inflation readings, or huge short positions on bonds by hedge funds going south.
So yeah, the trend for rates appears to be up and up. But, don’t hold your breath, as anything can happen.
