Rates Spike on Tuesday Provided a Preview for the Wary

Yesterday’s article from Multi Housing News on Tuesday’s rate spike got me thinking about the following thoughts…

 

Market behavior over the last few years has certainly been a case of Jeckyll & Hyde. Long periods of low volatility and smooth upward performance in the stock market lulled people into a dreamy state which turned into a nightmare almost overnight as disruptions in the markets spiked volatility and drove stock prices down in a very short time.

The interest rate market is shaping up the same way. Ultra low rates for a long period of time has caused people to ignore rates generally speaking and create a situation where not many individuals outside of people in those particular markets (bond market, swap market, etc) even notice. Tuesday was one of a few short instances that gave a preview of things to come – treasury rates jumped in the open market causing borrowing rates to spike.

The market does this from time to time – a few years back in June of 2004, interest rates jumped seemingly overnight as market operators thought the market was shifting. It ended up being a 2 week phenomenon as rates came back down. That was a warning – the mild panic that set in that month should have warned investors to what rising rates could do.

In the case of treasuries this week, rates fell the next day (Oct. 1) and I’m sure most people didn’t notice.  As I mentioned above, I think the treasury market/interest rate market is following the same path. A few days here and there served as mini warnings for the wary. At some point, The Fed will lose the bond market (i.e. lose influence over interest rates) and we will see the treasury market and interest rates move similarly to what the stock market just did. Rates could spike 1.5-3% in short time and the Fed will not be able to help (long term rates are set by the market, with some influence from central banked influenced short-term rates).

At that time, house prices will fall further as mortgages hit 8,9 or 10%. Especially since I don’t see pay raises coming for most workers.  What is most interesting about that article is that even though rates spiked, it focused on the return to lower rates the next day. And even though they offer some words of caution, I believe they, along with most other market observers, are not paying attention to this issue as much as they should and the warnings that these little one day “previews” offer us.

The alternative (though not likely) to a rate spike is a Japan situation – low rates and declining economy for 20 years – and that doesn’t sound so attractive either. As I have said many times, we need to get this correction over with in a big way and clean out this mess. This slow, drawn-out correction is the slowest way to recovery as we try to “save’ some people. We’ll just end up hurting everyone.

Let’s see what happens.

Chris Grande


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