Peter Schiff: The Bond Vigilantes Are Back

In Wednesday’s podcast, Peter breaks down the deteriorating bond market and what it means for mortgage rates, consumer confidence, and the broader economy. He also takes aim at the Fannie Mae and Freddie Mac trade promoted by the Trump administration, tying it all together with a warning that decades of easy money are finally catching up to Washington.

Peter starts with a stark look at where Treasury yields are headed, and the ripple effects already hitting ordinary Americans trying to buy a home:

At the rate that bond yields are rising now by the November midterm elections, the 10-year will be 6% if the current trajectory continues… But more relevant to the average American relative to the Treasury bond yield is going to be the mortgages, which of course mortgage rates are a function of Treasury yields. But now the 30-year fixed rate mortgage is 7.4%. Headed, I said 8%, probably by election day, but much higher than 8%.

Rising yields mean falling bond prices, and Peter explains why that dynamic is pushing both everyday investors and central banks toward a very different kind of asset, with many now looking to buy gold:

Bonds are falling in value. People are losing money in bonds. That’s why the yields are rising. And if you’re losing money in bonds, if you want to avoid losing more money and you sell your bonds, what are you going to buy? You’re going to buy gold. Central banks, certainly, who are selling Treasuries are going to buy gold.

It’s not just the bond market flashing warning signs. Peter points to a sharp and surprising drop in consumer confidence that suggests Americans are feeling the pinch far more than headlines might suggest:

So the consumer confidence numbers came out. These are September numbers and the number plunged from 88.6 in August which was already a downward revision… Instead of rising to 90 the index tanked all the way down to 81.9. That is the lowest in 12 years. So consumers have not been this worried in 12 years.

Peter ties these threads together into a bigger picture of where the US now sits fiscally. He describes a kind of economic quadrant system to explain just how precarious it is to have high debt and high interest rates at the same time:

We are now in the fourth, I guess quadrant if you put it all in a box. We’re now in quadrant 4 where we have high debt and high interest rates. That is completely unsustainable and it’s the worst of all possible worlds, right? The best is low rates and low debt and you can argue that high debt and low rates may feel better than low debt and high rates but it’s unquestionable that where we are now when you have a lot of debt and now you have to pay a high rate to service it. That’s the worst place that you could be and that is where we are right now.

From there, Peter pivots to a sharp critique of the renewed hype around Fannie Mae and Freddie Mac, the government sponsored mortgage giants that have become a favorite trade among certain political insiders. He doesn’t hold back in describing what he sees as a setup:

They’re not great companies. They’re disasters. They’re their government created duopolies that shouldn’t even exist. They have a massive massive moral hazard. They’re socialist concoctions… I think that Trump in the early days of his administration was putting out all this positive stuff on Fannie and Freddie specifically to get the price of the stock up so that his friends and his early donors who already own the stock… could dump. I think the public was suckered into this trade and they loaded up on Fannie and Freddie.

Peter closes by zooming out to the bigger historical picture. For decades, the bond market simply let Washington do as it pleased, but he argues that era is over for good:

We had a 40-year bull market in bonds. They were able to ride that wave. They were able to continuously lower rates and expand the balance sheet and expand the money supply because there were no consequences. They can keep on borrowing and the markets didn’t care. The bond vigilantes were dead. Well, they’re all back. The markets care. They’re going to care more and more. You can’t put that genie back in that bottle and this is going to snowball.