The yield on the benchmark 10-year U.S. Treasury note averaged 0.79% from 2007 through last year after adjusting for inflation as measured by the consumer price index. It’s now minus 4.0%. If that’s not shocking enough, corporate bonds rated below investment grade, or junk, yield 4.57%, below the current 5.40% rate of inflation. Something’s got to give. To return to more normal conditions, ether nominal yields must rise or inflation must recede. Bet on the latter.
Since mortgage rates are closely linked to the bond market, enhanced yields would mean trouble for the highly-interest rate-sensitive housing sector. Declining mortgage rates led to a surge in refinancings that last year reached the highest since 2009. Also, the drop in 30-year fixed-rate mortgage rates from 4.45% in the second quarter of 2018 to 3.15% in the first quarter of this year more than offset the surge in house prices, helping to push the National Association of Realtors’ Housing Affordability Index up from 142 to 177.
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With Bond Yields, Something Has to Give - Bloomberg
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