Let’s look at two graphs of among the most boring things in the word: the U.S. 30-year mortgage interest rate. Here is Graph 1 (from Bankrate):
Whoa, that’s not boring. Whee, a slide down 70 basis points since the summer! Whee, a moonshot 85 basis points higher since mid-November! Back to 5%! Who says mortgage rates aren’t fun?
What is going on here? The narrative on this sort of thing is always tricky, because so much is going on, most importantly, quantitative easing and other government bits of fiddling about. Having said that, many people have a prefab narrative ready, and that’s that the “bond vigilantes” have show up, and are, moral and upright fans of sound money, stolid sovereigns, and balanced budgets, they are now forcing the U.S. to clean financial house by driving rates higher.
It’s a nice story, but almost certainly not true, at least not yet. First, we have no base case, so we have no idea what rates would look like were it not for the surprising (to some) recent strength in the U.S. economy. Second, this has come after an incredible run in the 30-year — not just the recent decline, but further back as this next five-year chart shows.
Doesn’t look nearly as dramatic now, does it. Matter of fact, rather than being a spike higher it makes the increases in the 30-year look more like a normalization, with rates heading back to something more like “normal” levels. Granted, this has been a fast bounceback, but attributing it all to the arrival of the fabled bond vigilantes seems more than a little breathless, not to mention suffering from a species of the narrative fallacy.
So, is this entirely without consequence? Merely happy news on the economic trail? No. The issue, of course, is that higher rates mean less refinancing at the long end, which means consumers having less money in their pockets, thus less money to spend, service debt, and, most importantly, save. There are other consequences too, but precious little to do with those bond vigilantes — yet.