Sunday, June 8, 2014

Evidence That Interest Rate Increases Are Self-Limiting

From a WSJ blog post:

You can see that the increase in average monthly payment, which was caused by a huge increase in the 10 year bond yield (almost doubled in four months), stopped the housing rally in its tracks.

I think there is a low probability that the 10 year yield could rise to the 4% level that bond bears were predicting, because of the effects that even a 3% yield had on the housing market.

What would another 100bps on top of that do to housing, or car purchases, or business capex decisions?

If my self-limiting hypothesis is correct, then 10 year bonds have more upside than downside, and they are not asymmetrically unfavorable as bond bears believe but rather asymmetrically favorable.


whydibuy said...

Oh, 4% interest rates will kill the economy.
HHHMMMMMM, so how did we ever have a growing, vibrant economy with long rates at 6-7% for all those decades?

Nathan said...


Debt / GDP is much larger now.

If the debt-servicing capacity of an economy is bounded by some fraction of GDP, then it stands to reason that as debt grows relative to GDP interest rates must fall proportionally.

Stagflationary Mark has numerous posts to support this theory (example).

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