Moneybeat: The price, not the rate

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JENNY ROUGH, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat

NICK EICHER, HOST: Time now to talk business, markets, and the economy with financial analyst and advisor David Bahnsen. David heads up the wealth management firm, the Bahnsen Group, and he’s here now. Good morning, David.

DAVID BAHNSEN: Well, good morning, Nick. Good to be with you.

EICHER: Well, David, last week you explained that one hope behind the Fed’s rate hike was that longer-term rates might actually come down, but instead, the 10-year Treasury went above 5% to 5.2 on Friday. The 30-year moved above 5.5, and that set off a lot of news stories, a lot of alarm in those news stories breaking out of the business pages and onto the front pages.

So, what happened between now and then?

DAVID BAHNSEN: First, the good news: the TIPS spreads, which is what we call inflation breakevens, that tells you how much of the overall 10-year is from inflation expectation and how much is from real growth expectation. The inflation expectations have gone higher, but not by much. So there is some confidence for some real growth that’s implied in a 10-year that is sitting at around 5.1 to 5.2 percent.

The answer is connected to the AI story, Nick, that there has been absolutely no corporate debt issued at the 10-year, 20-year, 30-year, for a long time, and at this level, this kind of supply, you’re seeing long-term debt from very high-quality credit issuers. I should point out Microsoft has a higher credit rating than the United States government does, so you’re seeing competition.

What happens to prices when there’s the same level of demand but a lot of new supply? Prices come down, which means the yields have gone up, and so that’s what’s happened in the bond market.

The Fed cannot do a lot to lower the long end. By showing credibility on the inflation front, they can bring inflation spreads down, and that’s why those have not moved a lot. But one rate hike was never going to be a huge factor. That’s why they’re pricing in a second one coming, and I think that the main issue for me, it would be what are we going to do about mortgage rates here?

Right now, the fact of the matter is, mortgage rates coming down is not going to be the lever that improves housing affordability. It’s going to have to be lower prices, and the sooner people realize that, the better.

EICHER: Well, David, let’s stay with housing for a moment. Talk about those mortgage interest rates. The Wall Street Journal says that these 7% mortgages squeeze not only buyers but also sellers who are reluctant to part with the much cheaper loans that they have on their homes, and reports of builders paying to buy rates down.

So how do those pressures reinforce each other?

BAHNSEN: Well, we’ve averaged about a 7% mortgage rate for over four years now, and there have been a couple times when it dipped into the six and a quarter to six and a half range.

Now you have the highest level of delta between sellers and buyers that we have seen since they started recording this data on a national level in 2013. You had a significant—about one in five of houses that sold last month had a price reduction. You had over 40% of home sales last month result in some sort of concession that may have been related to other factors in negotiation.

This has become a buyer’s market, and so I understand that sellers have been reluctant to trade out of a 3% mortgage, but keep in mind, Nick, every month that goes by, there’s less and less that still have those 3% because a lot of them were done as five-year and seven-year type interest-only loans, and so a lot of those rate locks are starting to come off as you get further away from when people were doing that cheap financing in 2020, ’21, ’22.

About May of ’22 was the last point in which people had that very cheap financing, and so into 2027, you’re going to see more of those five years rolling off as well.

So it’s all marginal. There’s no cliff level where all of a sudden something happens. It’s just month by month the data is more and more favoring buyers versus sellers. And to the extent that somebody says, “I’m not willing to lower the price of my home,” then they’re not really a seller, right?

And it won’t happen to everybody at one point, but it will be happening. And it will be happening with lower prices, and the reason is that the current level of prices are not affordable to the buyers.

EICHER: David, I want to turn to the diesel story. Diesel fuel, with prices sitting at record highs, President Trump expressed support for temporarily restricting U.S. diesel exports, the idea being that if more American-made fuel stays here at home, that domestic supply will go up and prices will come down.

But that’s not exactly how it works, is it?

BAHNSEN: No, it isn’t. And I gotta say that kudos to the president, who appears at this point to have walked that back on the advice of his advisers. I don’t know exactly what they’ll end up doing. As we’re sitting here Monday morning, it’s a moving target.

But what you saw, which was very encouraging to me, was a lot of people who have often been hesitant to criticize some of these ideas have really been out front of saying to the White House, to the president in private channels and publicly, this is not going to help. It’s not going to do what you think it’s going to do, and it will make things worse long term.

To just briefly explain why it’s such a bad idea, first of all, we need to start with first principles. The United States government has absolutely no business telling a company who they can and can’t sell to now, unless it’s a matter of national security.

And to the extent that we believe in supply-side economics, what you do is disincentivize production, and you signal yes to diesel fuel producers, but also to any number of other economic actors: “Hey, I didn’t know the government could just tell me I’m not allowed to sell to ally nations whenever they want to,” and so it disincentivizes production.

And what is it that is the greatest friend of bringing prices down? More supply.

It looks like it’s not going to happen, but it gave us a chance to explain to American people why that this is just not something that makes any sense. And, by the way, a lot of these more craven political ideas in advance of the midterms, none of them have helped politically.

EICHER: Well, and speaking of energy, David, your Dividend Cafe this week—the energy case that you made—is not really even built around today’s high oil price. You connected instead to the build-out of AI, more data centers. They need more power. More power requires a lot more energy infrastructure.

Where do you think investors are missing that connection?

BAHNSEN: I’m not sure how many American people wake up and even realize how electricity is produced, or that it was coal for a long time, and now natural gas is a larger factor. Those are not things that everybody necessarily thinks about.

I would say this, Nick. I do believe, as I wrote in Dividend Cafe, that the AI story is a particular catalyst, and that one can say, “I don’t believe that the AI story is going to happen,” but you can’t say you believe it’s going to happen and that it isn’t going to be relevant to power generation, which then involves not only natural gas but pipelines that are necessary to get natural gas to the end destination.

But if it wasn’t data center and AI, I still believe the exact same thing. We have a ton of natural gas in this country, and we have a ton of need for electricity and other forms of power.

And as long as we are heating our homes and as long as we are creating food, so that a society and civilization do not starve themselves to death, then we have a need for energy, and therefore I believe this not only represents a very compelling investment opportunity, but it’s a great economic opportunity, and you have the need to export this.

EICHER: All right, David Bahnsen, founder, managing partner, and chief investment officer of the Bahnsen Group. He writes regularly at dividendcafe.com and for WORLD Opinions. Have a great week, David. Thank you.

BAHNSEN: Thanks so much, Nick.

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