Bond Yields Spike: What Happens To Your Wallet Next? | Steve Hanke

David Lin (0:00)

Welcome back everyone, it's Tuesday, September 29th, and Steve Hanke, Professor of Applied Economics at Johns Hopkins University returns once more. US. Treasury yields are still rising. Both the 10-year and 30-year yields are each up about 1% on the day. This follows yesterday, Monday's rise as well, after Trump rejected an Iranian ceasefire proposal, oil went up in the day, and yields followed. Today, the 10-year yield still sits at the highest level since 2007, at 5.28% now, while the 30-year has now breached the highest level since 2002, now at 5.6%.

Higher yields raise Washington's borrowing cost. And now this concerns from other economists that we could have a run on the bond market, similar to a run on banks. Could this happen? We'll find out with our next guest. For households, the pressure is much more immediate. Expensive fuel, mortgage rates now above 7%, and weaker job prospects have slid consumer optimism to the lowest level since 2014, according to recent data from the Conference Board.

Now that's lower than the COVID era to put things into perspective. Professor Hanke is going to talk to us about the affordability crisis, the outlook for inflation, and the bond market, and ultimately the future of your wallets. Welcome back to the show. Professor Hanke, good to see you again.

Steve Hanke (1:22)

Yeah, good to see you, David.

David Lin (1:24)

What is your, forget, put on your citizen hat right now. We'll talk about the Fed, we'll talk about money supply, and we'll talk about the bond market. But just as a citizen of the US, what is your biggest concern?

Steve Hanke (1:38)

Well, the biggest thing, it does boil down to the affordability thing because the median household income in the United States is about $87,500.

So, anyone below that is really getting squeezed badly. And there are many people in that group. There are many more people below the median family income than above it. So you have a large chunk of the population where this affordability issue is a real issue, and it will affect the election. There's not quite as done about it.

David Lin (2:23)

Before we move on to the bond market, let me just pull up an anecdote. You told me once that when you were in university, I think I believe at the University of Colorado, you had worked three jobs, saved up enough money, and you bought as your first major purchase, not just one, not one apartment, but an entire apartment complex. I think you were 24 at the time.

Steve Hanke (2:48)

Let me just pull up a chart here. You nailed it.

David Lin (2:51)

When you were...

Why can't I only dream in 2026 as a new college grad professor? If you were 24 today and you looked around, and let's say you had the means and you had enough money to save that, would you do the same thing? Would you purchase property as your first investment as a 24, 25 year old today?

Steve Hanke (3:15)

Broadly speaking, yeah, I probably would.

David Lin (3:19)

The reason I bring this up is because by most valuation metrics, housing has become a lot more unaffordable in recent years. First I'll show you this. This is a simple home price to income ratio.

What you can see right now is above the 2008 housing bubble level, and certainly higher than the 60s when you were in school.

Steve Hanke (3:42)

Oh, you mean, okay, you mean, could I have, could I, if I was...

David Lin (3:48)

No, no, let's say, let's say you...

Steve Hanke (3:50)

If I was young today, could I afford to do what I did then in 1965? And the answer is maybe not.

David Lin (4:02)

Maybe not, but let's say even if you could, let's say you, you know, you got a great job and you're making a lot of money as a young person, would you invest in real estate and housing today, given how expensive it is on a home price to income ratio or even home price to rent ratio, whatever valuation metric you want to apply to this?

Steve Hanke (4:22)

Yeah, but that's whether you can do it.

And the second question is whether, you know, in principle, you would do it. And you have to put another chart of just real estate prices. Look at rental property. Look at the price of rental property. Yeah. Those were rental units, that small apartment complex with 24 apartments in it. But you want to look at where has the price been going? It's been going up.

David Lin (4:57)

Yeah.

Steve Hanke (4:57)

So why wouldn't I consider investing in it? Plus the fact in those days, it's actually something I knew a little bit about, or at least I thought I knew something about it, and that is appraisals, because one of my jobs when I was a student, I was working with Maurice Unger, a real estate professor and kind of guru. He wrote the key book, Real Estate, which is still in publication, by the way. I don't know what edition it is, but at any rate, I was his gopher doing real estate appraisals, and I was pretty good at it.