Juggling Dynamite

Zillow is sounding the alarm on surging Treasury yields as the 30-year Treasury hits its highest level in nearly 20 years. Higher Treasury yields are keeping mortgage rates elevated as the U.S. housing market already faces weak buyer demand, rising inventory, falling list prices, and some of the lowest home sales in decades. But mortgage rates might not be the real problem. Home prices remain historically expensive compared to household incomes, with the national home value-to-income ratio around 4.3 versus a long-term average closer to 3.5. Until that affordability gap closes, home buyers could remain on the sidelines even if mortgage rates eventually decline. Here is a direct video link.

With a median Canadian home price-to-household-income ratio of 8.9x nationally (versus 4.3x in America), Canada’s housing bubble says, ” Hold my beer…

Canadian home sales fell to about 37,000 in August, down 7% year over year and 0.7% from July, marking the slowest August in at least 23 years and even weaker on a per-capita basis despite population growth. The slowdown is broadening beyond Ontario and B.C., with declines in Alberta (-11.5%), Quebec (-7.3%), New Brunswick (-8.7%), and softer volume even in Saskatchewan amid major investment news. Nationally, new listings rose 3.3% while sales fell, pushing the sales-to-new-listings ratio down to 49.1% and favouring buyers.  Here is a direct video link.

The US Fed hiked its policy rate by 25 bps yesterday to 3.75-4%, as expected, and 16 of 18 FOMC members expect an additional hike in 2026 (two rate decisions remain: October 28 and December 9).

Anticipating stubborn inflation, eight of the 18 participants (roughly 44%) see further tightening needed in 2027, six see holding pat while 4 see cuts. No one on the committee indicated that they see an economic contraction (but they never do).

Stocks and bonds sold off after the announcement (yields/rates higher); both are rebounding again this morning (yields/rate lower). The influential 10-year US Treasury yield closed above 5% yesterday for the first time since April 2007.

In April 2007, oil (WTIC) was also above $100 a barrel, and higher interest rates were compounding financial stress even as the stock market remained near cycle highs.

The U.S. fed funds rate had been held at 5.25% from June 2006, and the consensus predicted growing demand and persistent inflation through 2007.

By September 2007, the Fed responded to an emerging financial crisis with a 50 bp cut to 4.75%, followed by an aggressive easing cycle through December 2008, ending at a policy rate of 0 to 25bps.

Contrary to consensus, commodities, equity prices, and corporate bonds plunged, while Treasury prices rose, taking the U.S. 10-year Treasury yield from 5.26% to 2% (as shown below).In 2007, as now, many predicted that equities and, particularly, Canada’s commodity-heavy stock market would prove resilient. That was not the case; the TSX  (in blue below) tumbled with the tech-heavy US NASDAQ (in red) from October 2007 through March 2009.

In 2007, Canada was not in the midst of a housing bubble bust.  Today, it is, along with many other countries including the U.S., U.K., Australia, New Zealand and China.  Record debt and falling home prices pose a significant economic burden.

No one knows how long the current geopolitical tensions will persist, but global demand will continue to fall out of necessity, as financial conditions tighten. We have seen this movie several times before

The world is grappling with energy-driven inflation expectations reinforced by tariff wars.

In response, the European Central Bank (ECB) hiked the deposit rate by 25 basis points to 2.5%–its second increase in 2026. The ECB expects inflation to average 3% this year, well over its 2% target. The Bank of Japan is expected to hike the policy rate by 25 basis points this week to 1.25%, prompted by a weak yen and rising import costs.

The U.S. Fed has held its policy rate at 3.5-3.75% since December 2025, but its next rate announcement is tomorrow, and markets are now expecting a 25bps hike, taking the overnight rate to 3.75%–4.00%.

The Bank of Canada held its rate at 2.25% this month for the seventh consecutive meeting since October 2025. Consensus currently expects the BOC to stay on hold through the end of 2026, amid the elevated economic pain of tariff wars, deflating home prices, and rising credit stress in major markets across the country.

Bond markets have been hiking market rates ahead of central banks. The 2-year U.S. Treasury yield is 4.65% this morning, the highest since June 2024, and typically signals market expectations for where the fed funds rate will average over the next two years.

The U.S. 10-year yield at 5% this morning is at a 19-year high, last seen in April 2007 — just before the Great Financial Crisis tanked economies, financial markets, and interest rates.

Canada’s 10-year Treasury yield at 3.96% is the highest since October 2023 and October 2007.

Treasury yields matter because they underpin other market rates. The influential U.S. 30-year fixed mortgage rate is above 7% this week, the highest since October 2023. In Canada, 5-year fixed mortgage rates have topped 4.5%, and the benchmark prime rate is 4.45%.

Canadian rates are around long-term averages. The issue is that they are about 5x the all-time lows of 2021-22, when Canadians borrowed record amounts, leveraged by rapidly rising home prices. As those loans renew, the rate shock is severe, and the impact is dawning now.

As I explained in detail here, while Canadian home prices have been falling since February 2022, affordability in Canada remains untenable for the masses. Demand remains weak even as motivated sellers keep lowering prices.

For similar reasons, home prices are falling in many developed countries all at once.

After America’s last housing bust in 2007-12, prices did not recover to the 2005 bubble highs for years, even as interest rates remained at historic lows through 2022.

As shown below, since 2005, the median household income needed to qualify for the median-priced U.S. home fell from $70,000 in 2006 to less than $45,000 in 2012. Unfortunately, ‘easy money’ and risk-taking spiked home prices again in 2022-2025, and the median income needed rose above $120,000 in 2026. Recent data suggests that the median U.S. household income is about $86,000.  US home demand is therefore weak in many key markets, and prices are trailing lower.

Refi activity, which lets people cash out and spend notional home equity, is contracting as home prices stagnate and fall.

Stock bulls miss that rising Treasury yields don’t just hurt home prices and debtors’ ability to spend. Higher Treasury yields make equities relatively less attractive to investors while raising the cost of capital for corporations and speculators alike.

Past rate spikes have led to liquidation selling in equities (both growth and dividend-paying sectors, as shown below courtesy of A. Gary Shilling), corporate bonds, and commodities, while central bank cuts and rebounding Treasury prices ultimately bring yields/interest rates lower again.

The latest shock in interest rates and commodity prices is likely to drive a final nail into the extraordinary spending and speculation frenzy since 2020.  As usual, the world of naked swimmers will ultimately be revealed. Bond Yields Could Come Down as Fast as They’ve Climbed:

A pullback in AI spending could bring long-term yields down by reducing bond supply and possibly slowing economic growth. An outright recession would bring them down fast.

In other words, despite what some deficit hawks have insisted in recent weeks, it won’t take an outbreak of fiscal responsibility in Washington to bring yields down from their recent highs. Many other things could do it.

This also doesn’t mean that 5% yields are a ceiling that should be a signal for bond buyers to stampede into Treasurys. But the prospect of lower yields in the relatively near future isn’t quite as remote as the worst-case scenarios would suggest.