Unedited Transcript:

Mark Struthers (00:00.194)

Welcome to the healthy and wealthy retirement, where your certified retirement counselor, Mark Struthers, takes a holistic approach to retirement. Going beyond finances and embracing holistic wellbeing, this YouTube channel will address not just the financial part of retirement, but also the social, the physical, and the emotional parts of retirement. Everything you need for healthier, a wealthier, and a happier retirement.

Mark Struthers (00:33.646)

Here is your host, Struthers. Welcome to the Healthy and Wealthy Retirement. My name is Mark Struthers, and you can tell it is Thanksgiving. I tried to do our traditional 5K with this on my head, and it would not stay. I could have sworn I’ve done this in years past. But happy Thanksgiving, everyone. Today, normally, we do something to be thankful for. And I certainly have a lot to be thankful for. But we’re actually going talk about mortgage interest rates.

And the reason being, well, one, this has been the topic of conversation for some time. And also I helped out with a piece on Bloomberg wealth about the outlook for mortgage rates. And one question that comes up is why have mortgage rates shot up? And the reason being, and I think this is a consensus, I think, of most people who watch this stuff. And I’ll flash up a couple of charts here that shows

As soon as it looked like Trump was going to win. And one graph is from the polymarkets. I think I have that term correctly. And I don’t, I’m not sure they’ve been around for a long time, but you always been able to, or for some time you’ve been able to bet on, put your money on these elections. And they hadn’t always been perfect, but this one seemed to have called it pretty quickly. So as soon as it looked like Trump was going to do better. So people were putting their money on this.

that Trump would win. I got to add, this is I’m not taking political sides here. These are simply observations. So it’s just as I do it with both sides. So anything I say, please no, negative comments as far as the politics. But these these are because there’s going to be pluses and minuses for both sides on this. But this is just observations that seem to be pretty clear that as soon as it looked like Trump was going to win the

And I’ll go positive, the stock market seemed to go up. But also interest rates seem to go up. And the 10-year Treasury, and we’ll put up both those graphics. The 10-year Treasury, and I think we have the 30-year mortgage, we’ll put up at least a couple of those, two or three. So as soon as you saw the odds of Trump winning starting to increase, mortgage rates started to increase. And that was mainly due to the 10-year Treasury going up.

Mark Struthers (02:58.477)

The simplest way to think about these things, to get a better grasp of them, is to think in terms of short term, say from zero to two year bonds, kind of like savings account rates, which have all shot up post COVID. Now they were up around five. Now, generally speaking, some have pulled back to around four, but then they somewhat stabilized and increased too. But where you saw the biggest increase was the 10 year treasury at one point, I think was down to 3.5, 3.7 % somewhere in there.

shot up to I think at least 4.5%. Mortgage rates have a little bit of mind of their own. So there’s supply and demand, there’s economic factors. But you saw those go up as well to from six, I might even got a little below six, to around seven just above. I think they pulled back a little, but you kind of get the idea. And many people found that confusing. They said, well, the Fed is lowering, because the Fed has lowered rates — down to 4.5 % to 4.75%.

And so, and because they’ve done three quarters of a point reduction here, they did 50, half a percent, 50 called basis points, fancy term, half a percent months ago. And then just recently they did another quarter percent and they’re expected to do more because as they normalize rates, as inflation comes down, you know, even if we still have some inflation, they’re trying to get ahead of it. And they also just want to be more of an abnormal place. You could also consider it kind of a neutral place.

So as those rates were coming down, many of the bond market tries to get ahead of this. They often don’t wait. More so on the longer end. Now you could think of terms of seven years plus, 10 years plus, that’s where that longer end, we use a 10-year treasury as kind of a benchmark, if you will, a reference point. The shorter end, the Fed has more direct impact on. Obviously, still other factors. So if no one buys the bonds, the price

Mark Struthers (05:05.761)

will go up and rates will go down. So if no one buys the bonds, the price of the bonds are going to go down, meaning rates are going to go up. And I won’t try to get too far into that inverse relationship. But just to say that the Fed isn’t the only game in town. Now, at the shorter end of the curve, again, think in terms of bonds that mature within zero to two years, that’s where they have the greatest end.

So we saw mortgage rates go up. And that was because people were concerned about debt and deficit. Both parties were going to plan on a lot of spending. The market was also concerned about tariffs. And I know it’s a controversial subject, but the market in general, and I would say even a lot of MAGA supporters would say that tariffs can be inflationary. So it was concerned about, well, they all do the positive. they thought Trump would

deregulate, that would be more growth to the economy. And there was a lot of animal spirits, again, not taking sides, but just pretty clear the stock market too that, you know, I know Democrats were disappointed, but the stock market thought that we could have a resurgence of growth. Growth keeps going, stronger labor market. That may be too much so. That if we have too much growth and if we have inflation because of growth, or inflation stays a little stickier,

or maybe doesn’t decline quite as fast as we’d hope, in tariffs certainly could play a factor as well, that the rates might be higher for longer, and also concerned about debt and deficit. Now the debt and deficit is where those longer rates, like the 10-year treasury, come into play. And remember, it’s not a hard science. Supply and demand, monetary issues, inflation issues, all these other things. But that’s why you saw from that chart,

pretty clear correlation. As soon as Trump looked like he had a better chance of winning, the mortgage rates started to increase, the 10-year Treasury started to increase, and that’s the reason it went up. So, and as I talked about in Bloomberg, I would not want to be a first-time homebuyer now. It is tough. People are hesitant to move when rates are higher. There’s still shortage of supply.

Mark Struthers (07:29.673)

Even if you have a downturn in the economy, unless it’s prolonged and protracted, the price of the homes could still stay higher because people just won’t move. Especially when you’re talking people that have a 2 or 3%, 4 % mortgage, they’re not going to want to trade that for maybe a 7%. 6 seems to be a magic number. Most of these mortgage real estate professionals seem to think that once you get below 6%,

That’s where that talk about animal spirits, the market, the animal spirits of the market got a boost when they thought Trump would win. And when he got elected, the animal spirits for the housing market seems to be six that people maybe are willing to trade their 4 % mortgage for something with a five in front of it. So, I think it’d be tough if you’re, if you’re having to be a first time home buyer with prices being so high, the supply of homes is lower.

And also just affordability because mortgage rates are higher too. The idea that we get back to sub four is not likely. So one thing that when I talk to clients, they often try to help explain this. talk about, well, spreads. So when we think about what the Fed funds rate is compared to the 10 year treasury, and this is not exact, obviously that can be inverted. that’s just usually a sign of recession happened here recently. And even I think it actually kind of re…

It went back to being inverted. when it’s just a recession, although it did not happen here, it seems unlikely we have a recession anytime soon. At some point we will. Recessions are a fact of life with a free market economy. But when we think about the neutral rate or the federal funds rate, you could think in terms of tenured treasurer being 1 to 2 % higher. So that’s the difference between shorter term debt and longer term.

And that makes sense. mean, you should be paid more for loaning the government money for a longer period of time. The idea that you’re going to be paid more for loaning the money in a short period of time, if you were going to loan someone money and it was for a day, you would not charge them as much as you were loaning the money for 20 years. So at some point, that kind of natural relationship is going to come back. It’s just a matter of when.

Mark Struthers (09:56.589)

The yield curve was inverted for a long time and then un-inverted here as the Fed started to lower rates. It’s still pretty flat, so it’s been bouncing around. But if we think about the 10-year treasury in relationship to the 30-year mortgage rate, it’s typically 1.5 % to 2.5 % higher, think in terms of 2%.

So right now the Fed funds rates is 4.75%. And obviously you could say, well, Mark, the 10-year Treasury is at around 4.5%. Come back a little bit. it was down to around 3.75 before it looked like Trump would win. And then it’s come up here with the fear of growth and inflation and debt and deficit. When the bond market’s concerned that the government is taking on too much debt and deficit,

And you’re talking about it’s not just the US. Internationally, folks might say there’s more risk there. The idea that the US government defaults on his debt is silly, at least at this point. But it still plays a factor. They used to call them kind of bond vigilantes who would say, you’re taking on too much debt or deficit that we’re not going to pay. We’re not going to buy your bonds. You’re asking too much.

But the reason why, even though the Fed hasn’t gotten down to where most spreads I talked about make sense, is because the market, the bond market, the stock market tries to think in terms of what’s going to happen in the future, prices things before they happen. And sometimes they’re wrong. In the short term, anything can happen, especially when you’re talking about these quant traders, this computer driven trading where it’s just, they have a…

algorithms that dictate buys and sells. So in the short term, who knows? But generally speaking, it tries to guess ahead. It’s not going to wait until the neutral rate, the federal funds rate is down to 3 % before it starts factoring in what the two-year treasury say would be or the 10-year treasury. So it tries to anticipate like it anticipates, like it did when it like Trump was going to win. So

Mark Struthers (12:13.197)

If we assume that the Fed is going for three to three and a half percent, right now the neutral rate, because they think it might have to be a little bit higher for longer, I think it’s, people are thinking in terms of four, maybe a little bit less. You could think that 10 year treasury is around four, four and a half percent, which is what it is. And then the 30 year mortgage would be around seven, which is, is what it is. I would think that, and we could have a good economy like with that.

We could have a good economy if they do get that federal, they drop the federal fund rates, say down another one, one and half percent point. And the turn near treasury stays up in there. There’s nothing that says that that isn’t manageable. And we’re assuming inflation moderates as well, maybe a little bit higher, but if wages are strong and so on. I tend to think that longer term, the Fed is probably shooting for something around

is less than three. Then you could think in terms of the 10-year treasury at being 4%, maybe a little, around 4%, maybe less. You know, if we do get a 10-year down 3.5, you would think that the funds rates would certainly be, as we mentioned, kind of that normal spread, would be at 2.5, which, that works too.

But I think mortgages being at 6 % or less. It’s not to say that in the mortgage rates always seem to be more untethered to what the Fed’s doing in these hard and fast rules. It can kind of have a mind of its own. But you make sense that when you talk about the cost of money and the 10-year treasury is still the main benchmark, it’s going to be at least somewhat tethered to that. It’s going to have a mind of its own.

And especially if it tries to anticipate where things are going. So I hope that adds some color as to, and I will post the Bloomberg article, why mortgage rates went up when everyone’s kept thinking. And I think I even did some pieces about why, about rates are generally the errors on the downside. What we did not anticipate was kind of this increased outlook and growth, you know, and that for the pro.

Mark Struthers (14:33.207)

pro-Trump folks, for the MAGA folks, that they’re excited about deregulation and growth like that. But they also, think maybe the market really was waiting to see what the two parties would come up with for debt and deficits. And none of that’s really been addressed. It’s possible that they’re able to do some cuts with the federal government, Musk, and there’s the Doge department. And if they do that and growth is still good, that might work out.

But we don’t have a lot of history that that’s been successful under either party. And if you do have a lot of government layoffs, at least in the short to intermediate term, those are people who are unemployed. They’re not going to be spending money. Again, there’s always trade-offs. But the question is, how can this help with your retirement? Blocking in rates now. This is where I said this months ago.

And some of the, none of the rates got back up to where they were, or even that the 10 year treasury went from, call it three and a half. don’t think it quite got there back up to four and a half. I know it was well above four and a half, but, when you think in terms of retirement planning, you can’t time the top or bottom of anything.

But it is safe to say that inflation is probably coming down. Could we have another bout inflation if you’re just retiring now in another 15 years? Absolutely. We don’t know what’s going to happen. We’re making educated guesses. when we think in terms of for the foreseeable, we know generally inflation doesn’t run above 3 % for very long. 30 % is not uncommon. But the idea that

When we do financial plans, we assume different inflation rates for different things, but kind of general inflation, and I use a number of different things to do the calculation. But I think we have a general inflation at 2.75 % education inflation at I think 4.5%. I think healthcare at 5.1%. Don’t be too bogged down with those numbers. But the idea being that if we assume that inflation over the long term, which is retirement, that’s what you’re concerned about,

Mark Struthers (16:49.919)

is going to be sub 3%, at least close. We’ll say two and a half to three. And your 10-year treasury is yielding 4.5. Could it go up to five again? It couldn’t. Could it go up to six? It could. But all indications are that inflation is slowing. COVID or whatever, whoever you want to put blame on for inflation, that’s in the rear view mirror that we’re starting to normalize. Could it take longer to normalize? It could.

Could normal be higher than what, well, I think it’s safe to say one is going to be higher than what we’re used to. De-globalization and active Fed, which that’s probably not going away, but the Fed’s ability to do much with that deficit is probably going be more limited. So the idea that we go back to 0 % money and 2.5%, we’ll call it 3%, 3 % mortgage rate, 30-year mortgage rate, it’s probably gone.

The idea that we have something more normal where maybe we do get, where money, short-term money costs at least 2%, 2.5 % in going, I went through the numbers before. But you can lock in rates. So, and if you go to riskier bonds like corporate bonds, now because the outlook for the economy good, the spread on those, we’re talking a lot of spreads today, is narrow. But if you’re, especially if you’re using individual.

individual bonds. That’s where individual bonds for retirement planning often works best because we know what we’re going to get. Borrowing a default or borrowing a bond being called. Buying an open-ended mutual fund, bond fund, could that work? You know, there’s a number of reasons why that could work, but for retirement planning, that’s why individual bonds often work best because we say, I know if I hold this bond to maturity and they don’t default and for U.S. treasuries, you know,

and munis to a much lesser degree for those in the higher tax brackets. I know I’m going to get this. I don’t have to worry about selling a bond mutual fund when it’s 20 % down, like many folks did to pay the bills in 2022. So we don’t know the top or bottom of anything, but what makes now different than before was

Mark Struthers (19:09.153)

We have higher rates. have higher yields on these. We have yields that are probably above inflation, even a two year treasury yielding 4%. Might not be five, but we know that that’s above inflation and inflation probably is not going back there. Could it? Yes. But we are locking in these rates that are, getting, you’re getting a real yield, real meaning that after you adjust for inflation, you still have something left. Back in the day,

If you had a one year treasury yielding, I’m just going to say zero for, we’ll use half a percent, like a savings account.

And inflation was even at 1 % or one, let’s call it one and a half for round numbers. You were losing 1 % a year from purchasing power. Your purchasing power. Now you’re, you’re meeting inflation and you have something left over and with a risk of less risky asset and treasuries are considered risk free. So that’s how this is good for your retirement. So it’s not like we’re in 2022 where rates are high, but we don’t have an end in sight.

Now we have a pretty clear end in sight. We don’t know for sure. At least for the next two to 10 years, we’ll call it. know, my turkey hat’s falling down. We know what’s probably going to happen. And we know because we’ve, historically, it is just awful tough to have inflation running above 3 % for very long. So.

I hope this helps explain why mortgage rates did what they did. We’ll put that Bloomberg piece in the notes. And if you do put some thought into your fixed income, because it is a critical part of retirement, of matching assets to liabilities, of acting as a ballast, as producing income, you’re going to have a healthier, a wealthier, and a happier retirement. Don’t forget to hit subscribe.