Every other time, and there have been a few events over the past decade or more, where there was an opportunity to reset it seems like TPTB looked into the abyss, shit their pants, stepped back from the edge, and kicked the can. Is it possible to kick the can again?
Ken
Yes, there are possibilities to salvage the wreckage. There are a number of factors that are weighing down bonds and driving up the yield curve. Amongst a number of others, I can think of several circumstances that can be reversed, which will help to heal the bond market for now.
1) Putin needs to leave Ukraine and that 4.5 year mistake needs to come to an end.
2) Trump needs to leave the Middle East.
3) AI build-out needs to cool its jets.
4) Trump also needs to recant on his inflation comments.
5) The US federal government needs to get religion on deficit spending.
We need to see at least two of these items emerge immediately in order for the yield curve to move back lower. We need to see at least three to four of those over the intermediate to long-term to have any lasting effects.
Lost confidence and high inflation
I leave it to the reader to determine the likelihood of any of these circumstances unfolding. Perhaps Trump takes a 180° turn after the midterm elections. Perhaps he’s forced to leave the Middle East. A lot can happen. Unfortunately, a lot of permanent damage has been done and it’s not as easy as just withdrawing.
All of this inflationary pressure would take longer to subside. If the necessary prerequisites that I mentioned are achieved, the residual price growth problems could take at a minimum, 12 months to subside to manageable levels. It also could take as long as 24 months. A lot of confidence has been lost and that is difficult to restore in the short run.
Of course, a short run solution would be for the Federal Reserve to begin buying up US Treasuries again, but any action in that regard would be highly inflationary. More over, it would also risk causing a further erosion in the collective confidence of the Federal Reserve as an institution.
The whole premise of QE was predicated on the Federal Reserve’s ability to add debt to the bank’s balance sheet when inflation was low and when there were disinflationary catalysts plaguing the economy. Obviously, none of these factors are evident now. Thus, another round of QE would be easily exposed as a desperate attempt to keep the house of cards from collapsing.
I’m preparing for the worst
As for me, I’m not betting on any of those situations reversing anytime soon. I just finished refinancing an existing loan just before bonds took a big dump. I was able to refinance a DSCR loan at 6.05% and closed on it 2 weeks ago.
I should be closing on another 30-year fixed DSCR loan tomorrow at 6.5%. Currently, the second one is an ARM that resets in 12 months from now at SOFR plus 6%. That would make it about a 10% reset from a current 6.25%. By refinancing this second loan, this would eliminate the need for me to pay down more principal and concern myself with the potential for a much higher interest rate next year.
I’m not waiting to see the whites of their eyes to begin shooting. My financing should take me through the tribulation in fine shape, plus because of my pre-refinancing principal paydown, the two new refinance loans will save me about $1,000 a month in mortgage payments. There are many ways to prepare.