With employment on the rise and an uptick in economic activity, the Fed appears to be on track for a half-point increase in interest rates by the end of the year with expectations of another full point being added in 2016.
The increases should continue to drive mortgage rates, which crossed above the 4 percent mark for a conforming 30-year fixed for the first time since 2014 last week, higher.
The Fed can’t raise rates. Think of the default wave that would trigger in the $1.3 Trillion student debt market. Mind you the value of American subprime mortgages was estimated at $1.3 trillion as of March 2007. But the even bigger reason is the US Treasury, with a $18.2 Trillion debt principal amount, can’t afford a normalization of rates which historically would mean a the 10 yr note going from its current ~2.2% to just under 5%.
The US debt in 2014 grew by more than $800 billion WITH TODAY’S SUPER LOW rates (here’s the government’s own site if you wish to check). How can they afford for that debt growth rate to more than double? Note the deebt ceiling circus show will be revisited this October. Just 4 months. Also in October 2015 China is rumored to be announcing it’s own gold backed yuan and further plans with its own world bank, the competitor to the US lackey IMF, the Asian Infrastructure Investment Bank (AIIB).
Do some research before you dimiss this but the world is about to see the US Fed not only can’t raise rates bit will have to do more QE once Sept and Dec come and go with no rate increases. Want one last reason the Fed can’t raise rates? Google “Fed balance sheet chart”. Their balance sheet is over $4.5. Trillion with mostly US bonds bought at rates near 1%. Think of the losses they would incur on their own balance sheet if rates were to normalize.
Some of you in finance understand what I’m spelling out. Others will go back to watching Bruce Jenner and Kim Kardashian. This bubble has less than 9 months for sure.
1) How many people actually pay their student debt normally vs income based repayment and other deferrals?
2) What’s the term structure of the US debt? Rates are fixed not floating so a rise in rates won’t increase the amount needed to service existing debt. And will drop the value of existing bonds making it cheaper to retire existing debt.
3) What does a loss on the Fed books actually mean? What’s going to happen to these bonds? If they sell them to the government, that just extinguishes the debt on the cheap. Selling them into the market just takes money out of the system which could be usefull if inflation heats up.
1. New student debt is being created with the start of every school year. The debt, like your mortgage isn’t held by the lending institutions but is resold into the markets thus is affected by prevailing rates. Like corporate debt it isn’t all fixed at 30 year terms thus will be susceptible to a higher rate environment.
2. The structure of the US bond portfolio is constantly changing…there are Treasury bond auctions of various sizes, usually in the tens of billions nearly everyday certainly weekly. Thus not only is that newly issued debt but also old bonds that are also constantly maturing are both susceptible to increased rates having to be refinanced upon maturity or paid off. New debt is constantly issued because, in part, old bonds have to be rolled over. At the new market rates. So no you’re INCORRECT saying it won’t take more to service the debt due to those two reasons.
3. “What’s a loss mean/what’s going to happen to these bonds?” Anon, I recommend you see the documentary “Money For Nothing ” (free on Netflix & YouTube) for, with all due respect, it seems you don’t understand that the Fed is an institution with ZERO economic activity & simply controls the money supply (traditionally via interest rates but as that film explains QE is an experiment started in 2008 that the finish of which is still yet to be seen) hence their true currency is people’s faith. So for them to have a balance sheet of $4.5 Trillion of bonds bought at 1% matters. Those bonds are still at par if they were to try to sell them if prevailing rates are still at 1%. But if rates in the present environment are say 4%, selling that debt instrument earning 1% means the face value of the bond takes a massive hit. Who wants to buy a bond earning 1% when you can buy a new issue getting 4%? So how much faith will people, especially other countries bearing the majority of the losses because they are the major holders of treasury bonds (eg China, Japan)? Just as liabilities on a company balance sheet can be carried or “don’t matter” as you imply UNTIL THEY CAN’T REFINANCE IT. What’s that dependent on? The markets’cumulative FAITH in their credit worthiness/ability to repay.
Your final statement is most off, a common misunderstanding. As if just “selling them into the market ” just makes it not matter. Who buys those low yielding bonds Anon? Nobody unless their face value is marked down realizing a loss for the seller. Ultimately it’s the paper that loses purchasing power when these debts comes due.
If you read books and really want a excellent one on the Fed and what I’m explaining read “The Creature From Jekyll Island” or search YouTube for “Rothschild empire” to find this very complete history of banking. But one of the best I like, but less about the Fed, won the 2011 academy award for best documentary, it’s on Amazon Prime but worth it: “Inside Job”
UPDATE: Odds Against A Rate Hike Tomorrow, But Likely In December