Rates (and bond yields and financing costs for homes) may seem high to you, but that’s just because you’re too young to remember what “normal” is.

As many late-twenty and early-thirtysomethings whose parents aren’t on board with the whole “Moving back home to save money” trend might’ve been apprised by mom and dad recently, a 7.3% mortgage actually isn’t unusual at all. It’s only high relative to the last 20 years.

But, as I’m always keen to remind the curmudgeons among you, 1999 might as well be 1899 to someone who’s 25 years old. If I pull the plug on your electricity and tell you to stop whining because light bulbs are a relatively new invention and that candles are the historical norm, you’re not going to accept that. Or not happily, anyway.

It’s all about your expectations which are (necessarily) set based on your own experiences. Telling someone who has it bad in America that “It could be worse. You could be in Ukraine,” isn’t likely to go over well.

This is an important dynamic to grasp vis-à-vis the rapid rise in rates and bond yields. As BofA’s Michael Hartnett wrote, in the latest installment of his popular weekly “Flow Show” series, “US and UK yields have jumped from 0% to 5% over the past couple of years, but 5% is simply the average yield of the past 250 years.”

See there?! Anyone who’s 250 years old knows that current rates are merely middling. They’ve been lower, sure. But they’ve been higher too. You see a lot when you’ve been around for a quarter of a millennium.

The figure above is familiar. It’s Hartnett’s 5,000 years of interest rates chart.

Note the annotation. It’s not actually Hartnett’s chart. The source is Sidney Homer’s A History of Interest Rates. Earlier this week, Rabobank’s Michael Every cited the volume in a note called (hilariously) “Sidney Homer’s Odyssey.”

Before getting to Every’s remarks, the key point to grasp from a “pure” markets perspective is this: Markets spent the dozen years from Lehman to COVID optimizing around NIRP, ZIRP, LSAP and forward guidance. We forgot what price discovery looks like, and we forgot how to hedge interest rate risk too. Models were calibrated based on the low-vol era. And so on.

Markets experienced nothing but GFC-inspired monetary largesse for over a decade, and investors’ expectations evolved accordingly. Now, markets are being asked to accept an entirely different experience without the wherewithal to cope. If something goes horribly awry (think the UK LDI scare and SVB’s implosion), don’t be surprised.

On that note, I’ll leave you with a few excerpts from Every’s “Sidney Homer’s Odyssey.”

We are likely to see a third consecutive loss in US Treasurys in 2023, which has never happened since US independence. Most would therefore have told you that it ‘could not happen’; history is laughing at the bond bulls who are crying.

That’s partly because (Sidney) Homer makes the case for how unprecedentedly low rates during the New Normal were: The lowest for 5,000 years, or all of recorded history. It made some sense at the time, but the lowest rates in history for the rest of history was only logical if, Fukuyama fashion, history was over, and nothing forced rates higher again. But instead we got:

• Populist Western governments. One US poll now has Trump up over Biden 52% – 42% for 2024. Likewise, the FT shows growing up with low GDP growth makes one think in zero- not positive-sum terms, so the New Normal was self-destroying; and another op-ed underlines economic modellers now argue a 35% US tariff on Chinese goods would create 7.3 million new jobs, and increase household income by 17.6%. What was once anathema is now algebra.
• A global virus killing millions and invaliding up to 2% of the labor force, as the Covid ‘Batwoman’ warns new viruses are inevitable.
• Ultra-tight labor markets, where Austrian metalworkers want an 11.6% pay rise, the striking US UAW have support from both the president and his leading 2024 rival, overall strikes are at a 20-year high, the Wall Street Journal underlines ‘Why America has a Long-Term Labor Crisis, in Six Charts’, and ‘Hollywood Studios, Writers Reach Pact, Haggle on Language’(!), the latter getting what they call an “exceptional” deal with “meaningful gains.”
• A major war in Europe that will drag on for years, with concerns over other flashpoints.
• Supply destruction, as Nord Stream was blown up, and restrictions were placed on exports from rice to semiconductors. Russia just halted diesel exports, the lifeblood of the physical economy, pushing its price up again: France’s Macron may ask firms to sell diesel at cost in response, but slashing their profits and keeping demand for fuel high while supply is constrained won’t work.
• Global South ‘dedollarization’, to little effect so far, but maximum disruption if it does.
• Geopolitical fragmentation of global supply chains, with more to come.
• Ocean carrier giant Maersk dropping US military contracts to invest more in China. This underlines that the US needs to rebuild its own merchant marine rapidly, and so its shipyards, and so its steel industry, etc., or else end up in very, very ‘Deep Ship.’ How else will the US military move stuff around if foreign-owned civilian ships won’t do it?

As the WSJ’s Nick Timiraos quotes Powell at last week’s Fed press conference, “There is a long list.” 

Notably, RaboResearch predicted most of this global backdrop years ago. Perhaps we were too early — but better that than too late. Perhaps we were just lucky — or maybe an historical political-economy methodology worked. Regardless, today you don’t need as much chutzpah to look at diesel, politics, geopolitics, demographics, deglobalization, debt levels, the green transition and massive bond supply ahead as structural factors arguing for the risk of higher rates and bond yields than in the recent past.