Quite often you’ll come across someone spruiking the Treasury “no-brainer” trade. That is the trade when the Fed’s money-printing results in an inflationary burst that ends the 30 year US bond bull market.
As Deus Forex Machina described this morning, there are echoes of this trade in the current rotation from bonds to stocks in the US.
As a result there has been a breakout in 10 and 30 US bond rates:
OK, so a breakout ain’t what it used to be! and that’s the point. Many of you will know that US mortgages are fixed and attached to the 30-year bond rate. Thus the small move has been enough to also shift US mortgage rates into a nascent up-trend:
And that’s the problem for the “no-brainer” trade. As soon as 30 year rates rise, US housing comes under pressure. The recent move is already opening small cracks that are set to widen. When rates fall, to get the benefit a US mortgagee must refinance at a lower rate. The last year or so of rock bottom rates has produced a very nice up-trend in mortgage refinancing:
And check out the relationship between refinancings and Pending Home Sales:
And the relationship between Pending Home Sales and house prices:
In short, if the “no-brainer” trade continues for a few more weeks, US refinancing and housing transactions are going to tank. The “no-brainer” trade is the no recovery trade.
