I think you've only discussed the first step in the debt chain. Every debt is also someone's asset. Higher interest payments by debtors implies higher interest received by creditors. What do they do with their increased income?
But you're assuming this "increased income" from higher interest rates actually gets paid. Of the ~$86 trn in total debt, ~$35 trn is government, state and municipal debt - that means the remaining ~$51 trn is corporate and household debt, much of which is floating rate. With cost inflation high, corporate and household earnings are being challenged, so do you think they can service a 1.75% increase in their debt obligations? I'm not so sure. Hence my comment about a potential credit crisis (defaults etc) should rates rise by this amount.
Household/consumer debt (aside from mortgage rates, which is worth a discussion of its own) is struck so far above benchmarks that it's not meaningful to talk about impact here. With a 760+ prime credit score your credit card will still charge you 15%+, adding ~2% isn't driving your decisions at that point.
What's been interesting to me is that most junk bonds (currently) are being issued at fixed rates and they've been "locked in" somewhat artificially low as people refinanced in 2020-2021. That had the somewhat funny effect of making it look like those companies are lower default risk (bonds won't have to roll until 2023+) which keeps the paper pretty rich, but now we've ended up with 355bps of OAS on junk in a market that's attempting to price in 5-7 hikes this year. At the very least, you'd expect that spread to blow out, just a question of structuring the trade...
As for mortgage rates, obvious question to me is "what happens to housing prices?" Of course, Tim Bergin took it in the teeth for years on end waiting for Canadian housing to fall, so maybe I'm not anxious to imitate him...
Regarding junk debt, total high yield outstanding is ~$1.6 trillion, so while that may be fixed, it's actually only a small portion of corporate debt outstanding, which tends to be floating rate and therefore exposed to rising rates and higher default risk. Then factor in margin compression/erosion from cost inflation, and debt servicing is further under pressure. Also don't forget that higher rates will also impact perceived credit risk and spreads, meaning those that previously could refinance may not be able to in 12 months time.
Yeah I'm pretty confident spreads will jump much higher; per your point, the current "freeze" in the surface-level rates seems quite thin for all kinds of reasons. Question once again is just "where's the trade" if one doesn't have a derivatives desk to call for friendly pricing on rate swaptions
As I outlined in the piece, I think gold and selected gold equities look very interesting against the wider rates/inflation backdrop. Much simpler than playing with derivatives.
I think you've only discussed the first step in the debt chain. Every debt is also someone's asset. Higher interest payments by debtors implies higher interest received by creditors. What do they do with their increased income?
But you're assuming this "increased income" from higher interest rates actually gets paid. Of the ~$86 trn in total debt, ~$35 trn is government, state and municipal debt - that means the remaining ~$51 trn is corporate and household debt, much of which is floating rate. With cost inflation high, corporate and household earnings are being challenged, so do you think they can service a 1.75% increase in their debt obligations? I'm not so sure. Hence my comment about a potential credit crisis (defaults etc) should rates rise by this amount.
Household/consumer debt (aside from mortgage rates, which is worth a discussion of its own) is struck so far above benchmarks that it's not meaningful to talk about impact here. With a 760+ prime credit score your credit card will still charge you 15%+, adding ~2% isn't driving your decisions at that point.
What's been interesting to me is that most junk bonds (currently) are being issued at fixed rates and they've been "locked in" somewhat artificially low as people refinanced in 2020-2021. That had the somewhat funny effect of making it look like those companies are lower default risk (bonds won't have to roll until 2023+) which keeps the paper pretty rich, but now we've ended up with 355bps of OAS on junk in a market that's attempting to price in 5-7 hikes this year. At the very least, you'd expect that spread to blow out, just a question of structuring the trade...
As for mortgage rates, obvious question to me is "what happens to housing prices?" Of course, Tim Bergin took it in the teeth for years on end waiting for Canadian housing to fall, so maybe I'm not anxious to imitate him...
Regarding junk debt, total high yield outstanding is ~$1.6 trillion, so while that may be fixed, it's actually only a small portion of corporate debt outstanding, which tends to be floating rate and therefore exposed to rising rates and higher default risk. Then factor in margin compression/erosion from cost inflation, and debt servicing is further under pressure. Also don't forget that higher rates will also impact perceived credit risk and spreads, meaning those that previously could refinance may not be able to in 12 months time.
Yeah I'm pretty confident spreads will jump much higher; per your point, the current "freeze" in the surface-level rates seems quite thin for all kinds of reasons. Question once again is just "where's the trade" if one doesn't have a derivatives desk to call for friendly pricing on rate swaptions
As I outlined in the piece, I think gold and selected gold equities look very interesting against the wider rates/inflation backdrop. Much simpler than playing with derivatives.