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Old 12-04-2017, 05:26 PM   #21
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Actually, I remember my mom and dad getting yields of 12%-plus on CDs in the '70s. Here's a chart. Check out those rates circa 1980, when Volcker was really putting the boots to inflation! People with money in the bank were cleaning up.

The folks who got hurt back then were folks who were in debt. Can you imagine taking out a mortgage when the prime was 16.75%? When DW and I bought our first house in 1988 I remember feeling pretty good that we got a rate of 9.5% with no points up front. Of course it was only a 5-year balloon ... fixed-rate notes were higher.
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Old 12-04-2017, 05:34 PM   #22
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Just a point on debt and inflation. We got a mortgage on our first house in 1975. I don't remember the interest rate but it was clear at that time that inflation was bad and not looking like it would go away. In inflationary times you want a fixed rate mortgage. The banks got creamed, the debtors made out like bandits. Real estate really did well in our area (Silicon Valley).
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Old 12-04-2017, 08:21 PM   #23
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The flattening curve indicates that even though short term rates are rising, intermediate and long term rates aren’t moving much. In fact the longest have dropped compared to a year ago.

It can give someone adding to intermediate bond fund some peace of mind.

Of course things could change in a year! Like if the economy takes off.

But, the current pattern is matching the last one with gradual flattening.
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Old 12-04-2017, 10:12 PM   #24
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Personally, I watched today’s action in the 5 year bond market and came to the conclusion that the 16 year decline in interest rates on the intermediate basis was ended today and an uptrend is beginning to exert itself. One cannot judge historically any flattening of the yield curve when the Federal Reserve is unwinding trillions of short term bonds and raising the rates, it is not the same FED that existed for 100 years of existence.

However, the 5 year treasury has more than doubled in 6 months from 1 percent to 2.14. If the 5 year was to double again in interest rates in the next 6 months we will be looking at a 4 1/4 percent 5 year treasury.

My personal belief is this article is absolutely as wrong as could be, I came to the conclusion in September that interest rates were going to accelerate and the 5 year breaking out to me, if it is not reversed very quickly here, is a sign the FED is starting to lose control of the markets they hold so dear
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Old 12-04-2017, 11:15 PM   #25
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..

However, the 5 year treasury has more than doubled in 6 months from 1 percent to 2.14. If the 5 year was to double again in interest rates in the next 6 months we will be looking at a 4 1/4 percent 5 year treasury.
...
Not quite right on the 5 year Treasury. Here is the Fed chart:
https://fred.stlouisfed.org/series/DGS5
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Old 12-04-2017, 11:42 PM   #26
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It didn’t drop below 1.63% this year, and that was a brief plunge. And it is just a bit higher than where it started this year @ 1.94%.
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Old 12-05-2017, 10:50 AM   #27
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Just a point on debt and inflation. We got a mortgage on our first house in 1975. I don't remember the interest rate but it was clear at that time that inflation was bad and not looking like it would go away. In inflationary times you want a fixed rate mortgage. The banks got creamed, the debtors made out like bandits. Real estate really did well in our area (Silicon Valley).
Agreed on fixed rate vs variable. In my area when we were in the market, though, fixed-rate mortgages were hard to get. We had the additional onus of buying a house with 40 acres attached. We had more than one banker show us the door because we weren't buying a cookie-cutter property in a subdivision. A bank couldn't resell our paper on the secondary. We ended up at a little one-office country bank that held onto the mortgages they wrote.

I don't see the high-inflation environment that this country has experienced as necessarily benefiting debtors, particularly because interest rates have tracked and even exceeded the inflation rate. This table from Freddie Mac shows the average 30-year fixed mortgage rate in October 1981 at 18.75% ... plus 2.3 points! Looking at those numbers on a contract would discourage me as a home buyer. And the CPI at its inflationary peak never came close to 18%.

Of course, hyperinflation like that seen in Weimar Germany, Russia or Venezuela benefits the debtor until the inflation eats up the value of his debt. After that, his money is just as worthless as everybody else's.
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Old 12-05-2017, 06:41 PM   #28
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...
I don't see the high-inflation environment that this country has experienced as necessarily benefiting debtors, particularly because interest rates have tracked and even exceeded the inflation rate. This table from Freddie Mac shows the average 30-year fixed mortgage rate in October 1981 at 18.75% ... plus 2.3 points! Looking at those numbers on a contract would discourage me as a home buyer. And the CPI at its inflationary peak never came close to 18%.
...
As always, it depends on the particular situation. If you bought in 1975 at 9% rates and real estate goes up while your metro based area salaries go up, it could work out just fine.

Example from our experience: bought Silicon Valley house for 50k in 1975 (5k down), could sell the same house for about 130k in 1980 (figures from ancient memory). If you bought that same house in 1982 at whatever rate, you would still have done very very well and could refinance as rates declined. People were buying real estate partly because it was a great tax hedge and inflation hedge. Not that I want those times to come around again.
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Old 12-05-2017, 07:50 PM   #29
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Absolutely, residential real estate is generally a great inflation hedge. Silicon Valley also had a great economic boom that helped things along.

I grew up in a blue-collar neighborhood in Chicago called Logan Square. The area was in some decline when Dad sold our home in '81 or '82, and the mortgage market, as previously mentioned, was tight. The place went pretty cheap, in the low five figures.

Thirty-some years later, the neighborhood has become kind of a hipster haven. People have remodeled a lot of the old brownstone and graystone duplexes into single-family homes. Gentrification has driven housing prices to levels that amaze me. Location, location, location! And timing.
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Old 12-06-2017, 06:29 AM   #30
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In inflationary times you want a fixed rate mortgage.
I don't get that, because for me it's the inverse. In _low_ inflation times you want a fixed rate mortgage.

Why: you can't predict the future. However, we do know that interest rates cannot go below zero on mortgages, upwards there is no such limit. In addition, most of the time salaries tend to inflate too in inflationary times.
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Old 12-06-2017, 08:47 AM   #31
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I don't get that, because for me it's the inverse. In _low_ inflation times you want a fixed rate mortgage.

Why: you can't predict the future. However, we do know that interest rates cannot go below zero on mortgages, upwards there is no such limit. In addition, most of the time salaries tend to inflate too in inflationary times.
Note I wasn’t saying anything about low inflation times. Actually I should have said ... in a sharply rising inflation period (like 1975).
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Old 12-06-2017, 09:58 AM   #32
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the yc may become inverted
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Old 12-06-2017, 10:12 AM   #33
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the yc may become inverted
If the Fed persists in raising short term rates it certainly could.
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