Will the US hit 1% on its 10 year government bonds?

[c1ue]

Discussion thread.

Why does this matter?

The ability of the US government/Fed to drop the US 10 year government bond rate further represents the only opportunity to revitalize, or at least defer losses in US real estate.

The present non-GFC related (though perhaps Euro crisis related) flirtation with 2% thus represents a potential inflection point a number of activities (as EJ alluded to in his Puplava interview):

1) The end, or beginning of the end, of real estate reflation - certainly successful reflation.

2) An inflection for the stock market. The indisputable end to the bond market bull means the money sitting on the previous easy ride must move elsewhere

3) An inflection for the stock market, plus the prospect of an interest rate bottom, has implications for PMs and commodities

As a note, Japan experienced briefly a 0.5% 10 year bond rate in 2003. Since then, it has fluctuated between 1% and 2%.

There are clear structural differences between the Japanese economy and the US economy, as well as structural differences between the source savings of US and Japanese debt, the US dollar as reserve currency, etc.

But it seems clear that the bottom in Japan was reached.

Is 2% right now the bottom in the US, with any further dip only an anomaly?

[karim0028]

Re: Will the US hit 1% on its 10 year government bonds?

This could very well be the beginning of higher rates... It depends on the market action in the coming weeks... Markets trade in specific patterns and this looks like a capitulation point after which rates climb higher in a fast moving fashion... The market dipped below the 08 low and snapped back above it... Lets see what it does afterwards... But, Anyone buying treasuries is bound to lose in the long run...

Take a look at the market action dec-jan of 08/09 on TNX....

[mesyn191]

Re: Will the US hit 1% on its 10 year government bonds?

I dunno might be too soon to call it. The situation in the EU hasn't finished deteiorating and there are shoes waiting to drop in China yet I think. It might be that this period of super low rates could last longer than many expect, including myself. Personally I've been thinking we're over due for Ka-Poom for a while now so it wouldn't be the first time I've been wrong.

[don]

Re: Will the US hit 1% on its 10 year government bonds?

The ability of the US government/Fed to drop the US 10 year government bond rate further represents the only opportunity to revitalize, or at least defer losses in US real estate.

Defer losses I understand. That's what's been happening. Could you elaborate on revitalizing? Include your take on the relationship between price and interest.

[c1ue]

Re: Will the US hit 1% on its 10 year government bonds?

Could you elaborate on revitalizing? Include your take on the relationship between price and interest.

As EJ noted in his FHN interview, there have been a number of bumps to the US economy due to cash from bubbles: Y2K/internet, housing/refi.

A protracted fall to 1% rate 10 year Treasury would mean a halving or more of interest costs for those already in a home; this is equivalent to a 25% to 30% drop in the principal and interest costs for a house payment - and a 20% to 23% drop in overall house payments (PITI).

If this were combined with rising inflation expectations, it is possible that the presently moribund real estate market might be revitalized. It wouldn't be 2003-2006, but it could be post 1996.

[mmr]

Re: Will the US hit 1% on its 10 year government bonds?

Possibly true, assuming:

- Mortgage interest remains tax-deductible
- Government continues to guarantee mortgage-backed securities (if not, the difference between mortgage interest costs and "risk-free" treasuries could widen materially)
- Potential homebuyers have jobs / income to qualify for mortgages
- Mortgage underwriting standards don't tighten further, especially if we head back into a deeper recession
- Property taxes don't rise enough to more than offset lower interest costs (already happening in some areas of the country)

For homeowners, any combination of these could more than offset the benefit of lower rates in terms of their monthly payments or ability to qualify for a mortgage at all.

We'll have to see if demand from investors / speculators seeking yield or nominal capital gains is enough to offset that.

[aaron]

Re: Will the US hit 1% on its 10 year government bonds?

There are not enough buyers to get a real estate revitalization. Many cannot get out of their current homes because they are underwater. Many more are boomering into old age (perhaps FL real estate will bottom) and are selling homes/downsizing.

Rates are super low compared to 4 years ago. Houses are 30% cheaper. It does not matter.

It is not the house prices or the mortgage rates that are holding the real estate down... it is the lack of qualified buyers. This will not change with even a 3% 30-year mortgage. It does help the banks generate REFI commissions (and lock people into non-recourse loans for eternity), however.

[c1ue]

Re: Will the US hit 1% on its 10 year government bonds?

It is not the house prices or the mortgage rates that are holding the real estate down... it is the lack of qualified buyers. This will not change with even a 3% 30-year mortgage. It does help the banks generate REFI commissions (and lock people into non-recourse loans for eternity), however.

Yes and no. Unquestionably the present and near future trend for housing is down, but a 3% 30-year fixed rate mortgage has far, far lower qualification requirements than a 4.5%.

Note in Japan the mortgage rates dropped as low as 2% for special circumstance mortgages (government program).

[aaron]

Re: Will the US hit 1% on its 10 year government bonds?

What year after their crash did real estate start to take off again?

[mesyn191]

Re: Will the US hit 1% on its 10 year government bonds?

Yes and no. Unquestionably the present and near future trend for housing is down, but a 3% 30-year fixed rate mortgage has far, far lower qualification requirements than a 4.5%.

Note in Japan the mortgage rates dropped as low as 2% for special circumstance mortgages (government program).

Rates aren't the problem right now. Its wages, savings, and debt.

You can put mortgage rates at near 0% and many still can't afford a home right now. They're mired in debt: school debt, medical debt, car debt, credit card debt, etc. So huge chunks of their income are going out the window all the time mean while they're stuck working low pay service jobs. The "norm" now seems to 40-50% DTI's and 3-10% downpayment, with most paying only 3% or less. Those USDA loans are 0%. As long as the job situation and wage situation is bad while debt load and cost of living is high the housing market cannot recover.

EJ estimated 2015 or so several years back and I think he was pretty close there.

What year after their crash did real estate start to take off again?

In Japan? I don't think it every really took off again. They've had a few false starts over the years but their RE never recovered.

[c1ue]

Re: Will the US hit 1% on its 10 year government bonds?

You can put mortgage rates at near 0% and many still can't afford a home right now.

25% of mortgages are under water, with another perhaps 25% within 15% of break even.

This still implies 50% of existing homeowners have enough equity to sell and buy a house.

In addition, mortgaged homes represent only 2/3rds of the overall housing market. All those full equity owners are also potential buyers/sellers.

Again, I've clearly noted that any bounce would not be a 2003-2006 type, but throw in visible inflation and you could conceivably achieve a 1996 style real estate bounce.

EJ estimated 2015 or so several years back and I think he was pretty close there.

I'm sure that forecast is as quality as others EJ has made.

However, the point above isn't interest rates alone. Ultra low interest rates combined with visible and rising inflation is exactly the prescription for early Weimar flight into tangibles.

In Japan? I don't think it every really took off again. They've had a few false starts over the years but their RE never recovered.

Correct, but note also that Japan has had deflation for 25 years now.

It is much harder to justify buying a house with 2 decades of past price falls to look at.