Transcript of THE 5% YIELD TRAP: Why The Bond Market Just Added $108,000 to Your Mortgage!
Wall Street Truthbombs
0:00Yesterday morning, the 10-year Treasury0:01touched 5% for the first time since0:04October of 2023. By lunch, it was back0:08under 4.95 and every network called it a0:12relief rally.0:13By the end of this video, you're going0:14to understand why that bounce changes0:16nothing for your mortgage, why the thing0:19protecting you from a worse number just0:21got much thinner, and the one auction0:24that happens this very afternoon that0:26nobody on television is going to even0:29mention.0:30My friends, there's a realtor's office0:33on the block on the way to the train0:35that I take every now and then, the kind0:37with the listing sheets taped in the0:39front window at eye level. I looked at0:42it cuz, you know, I was curious, and0:44three of them have new price stickers on0:47them. And two of those, if you stand0:50close enough, you can see the old number0:52showing through where the sticker0:54doesn't quite cover it up. That's the0:57whole story in a window. The headline1:00price changed. What it What is1:03underneath it, unfortunately, doesn't go1:06away. So, let's do the tape first1:09because the tape is genuinely dramatic,1:12and I'm not going to undersell it at1:14all.1:15The benchmark 10-year Treasury yield1:17printed an intraday high of roughly1:205.01%1:21the other morning, and that is the first1:24time it had traded with a five handle1:27since October of '23. When we say five1:29handle, that means the number before the1:31decimal is a five. That's like insider1:34Wall Street talk, just for the record.1:36Then, it reversed and spent the middle1:38of the day around 4.94 to 4.95. The1:4230-year bond was at roughly 5.33%1:46after a morning peak near 5.37%,1:49and last Thursday, that 30-year closed1:51at 5.37%.1:53Now, let me be precise about that one1:56because the sloppy version of this stat1:59is everywhere this week and the accurate2:01version is actually better. So, let's2:04get into that. People keep calling it a2:0619-year high. My friends, it's not. Go2:09pull Treasury's own daily curve. The2:11last time the 30-year bond closed at or2:13above 5.37% was February of 2002,2:1824 and a half years ago. And while we're2:22being precise, the 10-year touching 5%2:25uh is an all all uh excuse me, it's an2:28intraday event. It's not a close, right?2:30On Wall Street, we talk about closes2:32being important. Although, we can't2:34ignore intraday events. It isn't settled2:37a day above 5% since 2007. That was a2:41long time ago. It didn't do it in2:43October of 2023, either. The highest2:46close that month was 4.98%.2:49So, Wall Street looks at the reversal2:52and tells you cooler heads prevailed2:54ahead of the Fed. Well, here's the2:56problem with the cooler heads thing. The2:59damage already happened, but happened3:01somewhere else, and it doesn't bounce3:03back. We're going to dig deeper right3:05here, but before we do, please click3:07like and don't forget to subscribe. It's3:09really important to be in the know about3:11this stuff, especially now with this3:13very issue, and this is exactly how you3:15do it. Okay.3:17On Thursday, the 10th, while everyone3:20was watching the inflation report, the3:23average 30-year mortgage rate on actual3:25lender rate sheets went through 7%.3:28First time since May of last year. On3:31Friday, it went to 7.12%,3:35the highest since early 2025. Just the3:38other day, I ran into a mortgage broker3:41friend of mine at a dinner, and he was3:43telling me that thing just keeps going3:46up. I told him where I thought the3:4730-year was, and he said, "Uh-uh, I I3:50got the facts this morning. It's higher3:52yet. And he expects it to continue to go3:55higher. Okay. The Treasury came back uh3:57just yesterday and the mortgage,4:00unfortunately, did not. And if you4:02locked a rate in last week, you're not4:05getting a do-over because the 10-year4:07had a good Monday. But here is where4:09almost everybody gets the mechanism4:12pretty much backwards, including people4:15who do this for a living. So, the4:17instinct is to say mortgage rates spiked4:20because the spread blew out. Lenders4:22panicked, risk premium, everybody4:24widened. The exact opposite actually4:27happened. The spread between the 30-year4:30mortgage and the 10-year Treasury4:31actually narrowed last week to about4:351.92 percentage points from about 1.94%4:391.944:41the week before. That's 194 basis4:44points. It actually compressed while4:46rates were going up. Yeah, that's4:48exactly what happened. It compressed. Uh4:51think about what that means though for a4:52second. Lenders and mortgage bond4:54investors ate part of that move. They4:57didn't add it They didn't add to it. And5:00the mortgage rose roughly one-for-one5:02with the Treasury and the cushion in5:04between actually got a little bit5:06thinner. That's what that all means. And5:08that's the part that should actually5:09worry you a little bit because the5:11cushion is what's been saving you. The5:13long-run average for that spread is5:15somewhere around 1.7 to 1.8.5:19And at the moment that at the moment,5:22excuse me, at the worst of the 2022 and5:242023 stress, if you remember that, it5:27was over three full points, 300 basis5:29points. So, we're now much closer to the5:32floor than that ceiling. There's not a5:35lot of room left down there, my friends.5:37A wide spread is a kind of like a shock5:39absorber. It can compress and soak up a5:42Treasury sell-off. A narrow spread5:44passes the next one straight through to5:47your mortgage at full strength. Now, the5:50part nobody's going to put on5:51television. This very afternoon, the day5:54before the Fed decides, they're already5:57having their donuts talking today, but5:59tomorrow we're going to hear what they6:00think. The Treasury actually reopens $136:05billion of 20-year bonds, and the6:0720-year is the problem child of the6:10curve. Here's the number. At the August6:1319th 20-year auction, indirect took only6:1662.9%6:19Indirects are the standard proxy for6:22foreign and central bank demand. We've6:24been talking a lot about that lately.6:26Now, compare that to this current month.6:30The 10-year auction on September 9th,6:32indirects took in 79.2%6:35The 30-year on the 10th, 79.5%6:39and I want to be honest with you about6:42what that actually proves. Because the6:44lazy version of the story is that the6:47world has stopped buying American debt6:50and the auction data will embarrass you6:52on that, trust me. 79% indirect6:55participation is not a buyer strike.6:58That is actually pretty strong demand7:01from foreign banks, etc. September's 10s7:03and 30s were fine. The story is narrower7:06and actually more useful. It is one7:09maturity. The 20-year is the ugly7:12duckling no one has natural a natural7:15home for at the moment. Pensions, they7:17want the 30. Traders, they want the 10.7:20And 20 sits there in the middle of7:22nowhere land, no man's land. And that is7:25the one going to auction this very7:28afternoon with a 30-year yield at7:3024-year highs and a Fed decision just 167:35hours from then.7:38That's your shadow data. You know I love7:39the shadow data. Watch the indirect bid7:42on the 20-year auction this afternoon.7:45It will tell you more about the next 67:47months of mortgage rates than the press7:49conference on Wednesday will. And while7:52I'm correcting the popular narrative,7:54let me correct one more because the7:56curve is telling you something different7:59than the commentary is. The fashionable8:02explanation right now is a bond8:04vigilante story. We talk about that all8:06the time here at Wall Street Truth8:08Bombs. Foreign central banks dumping.8:11That's also part of that sort of common8:13narrative. Term premium exploding. We do8:16talk about that too here. Investors8:18revolting against the debt. Run the8:20actual numbers. Between the September8:221st and September 11th, the 2-year8:25Treasury rose 20 basis points. The8:2730-year rose seven. The gap between them8:30shrank from 88 basis points to 72 basis8:34points. That is the front end lending.8:37That is called bear flattening, and it's8:41the fingerprint of a market repricing8:43the Fed, not a duration revolt.8:46Remember, if it was the market8:48repricing, uh revolting, it would be8:51happening on the back end, but because8:53it's happening on the front end, that8:55means the market is reacting to what it8:57expects to happen with the Fed. And9:00that's a completely different narrative.9:02So, let's get that clear now. A real9:04term premium shock looks like the9:07opposite as I just described. The long9:09end leads, and the curve steepens. So,9:12the scary structural story is the one9:14with less evidence behind it. The boring9:17one, the market finally believes the Fed9:19is going to hike. [snorts]9:20Unfortunately, it's the one that the9:22tape actually supports right now.9:25Futures are pricing roughly a 90% chance9:28of a quarter point increase, uh coming9:30up tomorrow. And I want you to sit with9:33why that's worse news, and not actually9:36better news. A panic ends. A hiking9:38cycle, well, that doesn't end tomorrow.9:41If this is the market pricing the Fed9:44that is going to keep going, well, then9:46there's no snapback coming. So, what9:49does all of this cost at your kitchen9:51table? Because that's really what counts9:53to all of us at the end of the day. Now,9:55let me write it. Take a $400,0009:57mortgage. I love to do it that way.9:5930-year fixed mortgage. In late10:02February, the survey rate bottomed at10:045.98%.10:05Your principal and interest at that rate10:07is about $2,39310:10a month. At Friday's 7.12%,10:14it's about $2,694.10:18That's roughly $300 a month difference.10:20Call it $3,600 extra a year. And across10:25360 payments, it's about10:28ready for this? $108,000.10:31$108,000,10:33my friends. For the same house. Because10:36of what happened to a number on a screen10:38between February and Friday. And the10:42builders, they already know this. This10:43is where you see it in real corporate10:45numbers rather than in a headline.10:48Lennar's gross margin last quarter was10:50about 15.6%,10:52I believe. At the 2022 peak, it was10:5629.5%.10:58The company said its average sales price11:00was about $371,000,11:02reflecting roughly 12.9% in incentives.11:06That's the total package. Rate buy downs11:09and closing credits and upgrades11:11together. The stock is down roughly 43%11:14from its 52-week high. D.R. Horton's11:16margin went from 30.8% at its peak to11:2020.7%11:21last week. And that stock, well, that's11:24down about 24%. When a builder gives11:26back 13% of the price to move a house,11:30well, that's not a discount. That is the11:32builder paying your interest rate for11:34you out of its own margin. And margin11:37that thin to tell you how much longer11:40that can go. Now, the other side of this11:43because you know I like to always give11:45you the counter case and there is a real11:47one for this, too. First, the oil shock11:49behind part of this may be shorter than11:52people think. Brent traded as high as11:54about 109.7411:56overnight before coming back toward 10711:59on the Saudi pipeline shutdown. We have12:01a video on that. But, the US energy12:04secretary said yesterday morning he12:05expects the pipeline to be running uh12:08back soon. Reporting elsewhere says 5 to12:116 weeks. Somewhere in the middle12:13probably makes the most sense. It's not12:15going to turn out overnight, that's for12:16sure. Uh but, it may not take forever.12:19It will come back online because12:21pipelines, they get fixed. A similar12:23pump station strike back in April was12:26repaired in 3 days. Now, that's pretty12:28optimistic. Nobody actually knows. Now,12:31second, September's uh 10-year and12:3430-year auctions were strong. This is12:36not a collapse in demand for American12:38debt and I'm not going to go to pretend12:40that it is. Now, third, if the Fed12:43delivers a hawkish hold instead of a12:45hike on uh tomorrow, well, the front end12:49unwinds and yields actually come down in12:52front end paper. That is a live12:54possibility even at 90% odds, right?12:57There's still a 10% chance that that12:59doesn't happen. And remember, that's13:00just the market pricing the odds, that13:03doesn't mean it's going to happen. And13:04by the way, those things change by the13:06minute these days. So, here's what I13:08would actually do with all this crazy13:10stuff right now. Audit any adjustable13:12rate debt that you're carrying and find13:15out exactly when it resets. Look hard at13:17what you own in home builders and13:19regional banks. Both are highly13:22leveraged to this exact variable. And13:24understand the thing that most people13:26never learn. Your mortgage rate is not13:28set by the Federal Reserve's overnight13:30target. We talk about this all the time.13:32It's set by what the world demands to13:35lend the United States money for 1013:37years plus a Now you learned it, a13:40spread that is running out of room to13:42actually protect you. It's getting13:44thinner. Three things to watch this week13:46to pay attention to.13:48Again, the indirect bid on this13:51afternoon's 20-year auction and the Fed13:54at 2:00 uh13:56Wall Street time uh tomorrow and13:58Lennar's quarterly numbers. They come on14:01Thursday, the day after the Fed, which14:03will tell you what 7% mortgages actually14:06did to demand.14:08So your truth bomb for today is this.14:10The 10-year came back from 5% and your14:12mortgage, well, it didn't. And the only14:15reason it's not worse is a spread that14:17just got thinner instead of wider, which14:20mean the shock absorber is almost used14:22up and the next move comes through at14:25full strength. Join me every day for14:28Wall Street truth bombs where I drop14:29them right here before the market14:31figures it out.
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