Thread

1. bwb · 1789586180 · focus · HN ↗

   Get ready for a fun ride my friends :)

   Fun ride =

   Oil is going up, possibly for a long time, which will have a big inflationary effect on everything. And it appears the USA government has lost the conflict it started and effectively given control over key oil delivery channels to Iran. Not to mention Saudia facing real issues from rebel groups / Yemen (simplification).

   Government debt is high in several key economies, and the bond market is being saturated with AI-related bonds, as well as possibly people finally tired of lending the USA/France/UK money at low rates and demanding higher ones. And with higher interest rates and bonds rolling over it means more and more money going to pay for the debt, rather than core services.

   Wild cards lurking in the bushes... AI, AGI, RSI.

   And yonder you have a nuclear power floundering; its only source of hard currency is being rightfully degraded, and its leadership delusional.

   And the one to watch IMO... Russian wheat export ability: wheat prices are up considerably, and combined with inflation from oil, this is the kind of stuff that creates waves of political change like the Arab Spring.

   1. leptons · 1789586770 · focus · HN ↗

      This comment isn't helpful. Please explain for those of us without a degree in economics.

      1. iamnothere · 1789587523 · focus · HN ↗

         Higher rates means financing/borrowing is more expensive. Mortgage rates will go up, possibly pushing home prices down. This is neutral for buyers because of higher rates, but bad for sellers. Loans (personal or business) will be harder to come by. Layoffs, or at least hiring freezes, are more likely. Companies will move into a defensive rather than an growth mode. Higher unemployment will lead to more desperation, and possibly consumer defaults on loans and mortgages.

         Government interest payments, which are already high, will become higher after future bond sales. This will compound future budgetary problems and could eventually lead to cuts in entitlements. If so, expect crime and political instability (already a problem) to rise in the future. This will take a while, though.

         Normally rates are increased to lower inflation by reducing the supply of money. Given the multiple concurrent problems with energy (Hormuz, Red Sea/Yanbu, Russia/Ukraine, possibly Libya as problems are starting there, China is buying aggressively) then higher rates may not be enough to stop inflation. This would create a situation where both borrowing is harder and inflation continues to rage. This is very bad and will lead to demand destruction (nobody’s buying anything because it’s too expensive and they can’t finance it anyway). This results in a severe recession at the minimum.

         Edit: wow, I really set off a discussion with this. See replies below for clarification on mortgage rates, which is the least important part anyways. Also, I should note that a lot of the above is a worst case scenario, if energy isn’t solved soon and especially if bonds don’t respond to the hike, leading to further hikes.

         1. darth_avocado · 1789588854 · focus · HN ↗

            Mortgage rates are not decided by the fed rate as much as they are by the bond yields. There’s a reason why the mortgage rates were above 7% yesterday even when the fed rate has been stable for a while.

            This rate hike is aimed to stabilize the bond yields which in turn will lower the mortgage rates.

            1. hirako2000 · 1789589958 · focus · HN ↗

               But bond yields are based on a market.

               If interest rates go up, bonds get sold (for better yield bearing products), pushing the yields of those bonds higher. And it finds some equilibrium. The fact it isn't immediate has to do with short term vs long term bonds. When they mature and the pace of arbitrage.

               I don't see how a rate hike is meant to lower mortgage rate. And just looking at the figures shows it's the opposite effect.

               Logically, if borrowing money becomes more expensive, how could borrowing specifically for the purpose of buying houses become cheaper.

               1. darth_avocado · 1789591725 · focus · HN ↗

                  You have to look at the current context. Bond yields have been spiking, mostly because of the inflation expectations from oil prices and tariffs (mostly oil prices). Mortgages mostly track 10 year yields, which is why when fed dropped the rates back to back, the mortgage rates didn’t come down. The current hike (and the next one) is supposed to create a deflationary pressure, but also provide confidence to the market that the fed will step in to cool inflation if necessary. This in turn lowers the yield on 10 year treasuries and therefore mortgage rates.

                  The fed rate provides a floor for mortgage rates, but the 10 year yield and mortgage demand decide the ceiling. Currently the demand is pretty low, and therefore the yield mostly controls the mortgage rates.

                  1. hirako2000 · 1789594435 · focus · HN ↗

                     what I'm saying is that Fed hikes interest rates → bonds sell off → yields rise → mortgage rates rise.

                     This is logical and empirically observed.

                     But you are right on the longer term effect. Zooming out: Fed hikes → inflation cools → inflation expectations fall → yields fall → mortgage rates fall.

                     But the latter is not guaranteed, and it takes time.

                     I'm unsure to understand how the ceiling and floor mechanisms work. But will dig into that. Thanks.

                     1. darth_avocado · 1789600345 · focus · HN ↗

                        > Fed hikes interest rates → bonds sell off → yields rise

                        This part isn’t true. It can happen, but not always, especially right now.

                        1. hirako2000 · 1789633252 · focus · HN ↗

                           So far you are right, yields are falling since yesterday.
            2. iamnothere · 1789591297 · focus · HN ↗

               It seems like this would depend on the bond market’s perception of whether or not this hike is the start of a trend. It could be seen as a signal that political attempts to lower rates have been unsuccessful.

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