Uh oh…
There is a real risk we could see 8%+ mortgage rates over the next few months.
Economist Steve Hanke is on the warpath, sharing post after post about the enormity of the threats to the world’s oil supplies.
Here is a post in which commodity markets guru, Jeff Currie, explains that we’re facing one of our biggest oil supply shocks EVER, but we have not yet felt it because countries are still able to draw down reserves.
Reserves, however, will run out in a few weeks – and then all hell will break loose. Making matters much worse is the fact that Ukraine is knocking out Russia’s oil production.
Hence, if the war in Iran does not end soon, we’ll see oil prices skyrocket, per Mr. Hanke. And – we’ve seen how high oil prices can impact rates.
BUT – skyrocketing high oil prices are only half the issue. There is a secondary effect that will have a much greater impact on rates.
In this YouTube clip, renowned macro analyst Luke Gromen explains the real risk.
A. Oil is purchased in dollars. B. The Iran war is choking off oil from the countries that own U.S. Treasury bonds.
Hence, those countries will be forced to sell our Treasury bonds en masse to raise dollars to buy oil (and food for that matter, as food prices are also shooting higher because of the war).
(Keep in mind that when there are too many bonds coming to market, sellers have to offer higher and higher yields to attract investors/buyers.)
And this enormous extra supply of bonds will result in far higher yields/interest rates – on top of the higher yields we’ll already be seeing from high oil prices alone.
Here are a few things that could prevent us from seeing 9% mortgage rates:
- A fast end to the war – resulting in lower oil prices.
- The recessionary impact of the war offsetting the inflationary impact (investors would move from stocks to bonds).
- Central bank intervention in the form of rates and quantitative easing (where the Fed would buy up bonds en masse to absorb the excess supply, to keep rates lower).
Note: If rates do spike way up, it will likely be temporary. And, more interesting, I can still make a strong case for 5.5% mortgage rates down the road.
We definitely live in interesting times.
All we can do is keep making biscuits … like the apocryphal Portuguese biscuit maker I often reference, who completely ignores world events and just focuses on his craft.
