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Comment by fshbbdssbbgdd | Hacker News Reader

I have a ~million dollar fixed rate mortgage. If rates go up, I’ll be sad that the value of my house went down. On the other hand, I’ll be very happy to have a large fixed rate loan. Let’s call my mortgage rate X%, and let us assume that rates go to X+5. Then I can invest money to earn at (X+5)%, which means my loan is essentially a $50k/year annuity. My only wish would be that I could make the loan even bigger.

On the other hand, if the fed decides to allow inflation instead of raising rates, then the value of my loan will melt away and my home’s price will keep going up (that’s what has happened so far).

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The problem is that in a scenario of rates going up, both houses and general stock investments will go down together. They rarely diverge.

If rates go up to X+5, then I ought to be able to find bonds that pay X+5, no?

If you had bonds before they went up, your bonds will crash. If you buy them after interest rates are up, it means you were in cash before and uninvested.

Im not sure I see the point in finding higher yielding bonds. Also they will have higher risk, its not "free" to have higher rates.

No. 30 year mortgages and 10 year treasuries move in unison but they are not the same rate. You can see this on the first graph here:

https://www.thebalance.com/treasury-note-and-mortgage-rate-r...

Treasuries are some of the lowest-yielding bonds out there.

Yes and treasures are the only bonds that move in lockstep with 30 year mortgages. When people talk about the correlation between bond yields and mortgages those are exactly the ones they are referring to.

US Treasuries also are considered among the safest, least risky assets out there. This is true globally and has been for a very, very long time.

This is all succinctly explained in the link I posted above.

Lastly bond prices have an inverse relationship with interest rates, which means that as interest rates rise, bond prices go down. So no, when rates go up to x+5 you will never be able to find bonds that pay x+5.

> Lastly bond prices have an inverse relationship with interest rates, which means that as interest rates rise, bond prices go down. So no, when rates go up to x+5 you will never be able to find bonds that pay x+5.

Indeed, interest rates are inversely related to bond prices. And bond prices are inversely related to yields. Yields and rates are highly correlated. In fact, the way banks finance mortgages is by selling bonds. The market rate they can get on those bonds determines the rate they can offer to homeowners. So of course these rates move in tandem.

> So no, when rates go up to x+5 you will never be able to find bonds that pay x+5.

What? If the current rate is x, this means that this is the rate a bond being issued right now is paying. If the rate goes up to whatever, it means that bonds being issued right now are paying whatever.

No, there is an inverse relationship between between interest rates and bond prices. This is an axiom in the bond market. See:

https://www.investopedia.com/ask/answers/why-interest-rates-...

Yes, I know that. We are talking about rates.

Rates on bonds are meaningless without considering yield.

Rate and yield are the same thing. Whenever I’m paying a rate, somebody else is earning a yield. Whenever I’m earning a yield, someone else is paying a rate.

They are related but they are certainly not the same thing.

Yield is a normalised rate of interest, so that bonds of different characteristics can be compared. When people say a bond pays certain interest rate, they mean the normalised rate, i.e. the yield, otherwise they would make clear they're talking about the "nominal rate", which is different. Therefore in most contexts, rate and yield are the same thing.

Anyway, the thing is if the spot rate is x% you will certainly be able to find bonds in the market that pay x% interest (=yield), regardless of the fact that a bond's yield and price are negatively correlated (an irrelevant fact, for the purposes of this discussion).

Yes.

I don't know why you think home prices will go down if interest rates go up. they might not. especially in cities where everyone wants to go and where offer is low.

Supply and demand would indicate that higher interest rates would reduce demand. However.. demand is not ONLY driven by average cost. For people to straight-up not want to buy homes anymore would mean they'd need to move, or switch to renting. Prices may fall but I don't think they'd fall in lockstep with interest rates.

One of the things I am wondering about is how I have found housing that is not affordable to a single working adult but once you have two incomes the price is perfectly reasonable.

My hypothesis is that if there is a shortage of housing, then dual income households will bid the price up and this causes the appearance of unaffordable housing when the underlying cause is that there is a shortage. This effect does not happen when there is a housing surplus.

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