Will Rates Come Down Further?

Some musing on the cycle ...

Author

Todd Ballenger
February 28, 2025

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"When rates go down, money goes up."

Ray Dalio

Shorter this week as I’ve had that FLU that’s going around and been on my back much of the week. Warren Buffett said that interest rates are like gravity, and low rates are low gravity, whereas higher rates exert more gravity pulling things down. Housing is the big one we often care about, but it eventually impacts your assets and your wealth too! Savings, retirement, etc. I think it is getting clearer that the powers that be want (NEED) rates to be lower, but to do that without stimulating inflation you have to wreck some things - so the wrecking ball is out. Tariffs, layoffs, etc. and the more bad stuff that happens the easier it is to justify lowering rates.

there is about 65bps of rate cut now expected in the next year… and that has been increasing

taking money from lower income people seems harsh, but it helps keep inflation down, if you give money to rich people they save it…

30yr mortgage spreads though were unchanged at 2.34%, remaining off the 3.1% peak in June ‘23

As we’ve discussed, the spread is also coming down, which is helping rates… we could easily be driving toward a recession and may already be in one. More pain for assets shorter term but likely setting up for a stronger Q3/Q4 of this year… next year is a real wild card…

a BORROW SMART CONCEPT
BIG Picture on Rates

As foreigners stop buying our bonds, what must we do? Raise rates to attract other buyers,

  • The steady rise in foreign ownership of U.S. bonds (blue line) suggests strong global demand for U.S. debt.

  • Higher demand for bonds pushes prices up and yields down, leading to lower interest rates in the U.S.

  • The slight decline in bond holdings after 2020 might indicate lower demand for U.S. debt.

  • If foreign investors reduce bond purchases, yields must rise to attract buyers, increasing overall interest rates.

  • This would result in higher mortgage rates, auto loan rates, and borrowing costs.

  • Foreign investors increasing their equity holdings (red line) suggests confidence in U.S. stock markets.

  • If this shift diverts money away from bonds, bond yields could rise, leading to higher interest rates.

  • If foreign investors reduce U.S. bond holdings, the U.S. government may need to offer higher yields to attract buyers, leading to higher long-term interest rates.

  • If foreign demand for U.S. bonds remains strong, it could help stabilize or lower rates, even as the Fed adjusts its monetary policy.

Bottom Line:

  • More foreign demand for U.S. bonds → Lower interest rates.

  • Less foreign demand for bonds (shift to equities) → Higher interest rates.

  • The recent decline in foreign bond ownership suggests some upward pressure on U.S. interest rates in the long run.

Last newsletter we talked about LAG and I did a workshop for some of our current students on this topic… since I’m not writing today, I’ll share a behind the scenes conversation you might find interesting:

LIABILITIES
What’s Happening?

Looking good Mortimer.

need to see this bottom out….

some states entering recession, all real estate is local!

consumer are less leveraged

but they are also growing less confident, less confident less spending

I like big yields.

If you are not getting into these playlists, you should. I have 135 books left in my library and I’m done; I’ll be posting a link tree next week for all of them, but save these in your Spotify (or Apple or Amazon) favorites and just hit one a day on your drive to or from work:

PSYCHOLOGY AND PERSONAL DEVELOPMENT

Playlist · Todd · 42 items

open.spotify.com/playlist/4U7cwIqYijW1Ko8RT7YFjP?si=10c100045daf4042

REAL ESTATE
What’s Happening?

Great visual on house values and growth rates by year from REDFIN

a lot of stress on housing

supply still firming up over 9 months

sales trickling down

prices trickling down

annually our national appreciation back to around 4%

we are tracking close to last year

but to maintain they are cutting prices faster

just to keep inventory firm

In ‘real dollars’ adjusted for inflation, house prices peaked again recently and may be about to roll over a bit - how far is probably a function of interest rates

From: CalculatedRisk - you can see prior peaks and return to peak is 6.5 - 14.5 years

ASSETS
What’s Happening?

Trump Volatility on display - Tariffs and uncertainty

Make Volatility Great Again - buy on Tuesday and Sell on Thursday

staggering the concentration of wealth

but those wealth effects lead the market - lower markets lead to recessions, not the other way around… if you feel less rich you will spend less, cycle accelerates

what was holding up the market is no longer…

confidence is dropping

financial literacy is key

net after taxes the ‘market’ of equities is king

“it make sense to stop making cents” - David Byrne

ON BEING HUMAN
What’s Worth Sharing?

"The greatest danger to our future is apathy. We can't all save the world in a dramatic way, but we can each make our small difference, and together those small differences add up. Every single person makes an impact on the planet every single day. The question is: What kind of impact do you want to make?"

Jane Goodall

the impact of these actions may reverberate for years and years…

DOPAMEMES
And Other Happy Moments…

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