Friday charts: The old normal

In 1980, The Washington Post reported how quickly rising mortgage rates were pricing borrowers out of the housing market:

“When people found out that the largest banks were raising their rates to discourage loans, they realized that they just couldn't get the 13 percent loans that they could a few months ago. It hit home that they couldn't afford it and they're deciding not to buy."

Imagine a 13% mortgage seeming like a good deal! 

A few months later it seemed like an even better one: In October 1981, the cost of a 30-year mortgage hit an eye-watering 18.5%.

At that rate it cost about $12,000 a year to service a mortgage on a $70,000 house (the median cost of a house at the time).

If you could even get a mortgage, that is. Because most couldn't, at any price.

The Post also reported that 40% of the mortgage lenders it surveyed had stopped making loans entirely. Another 12% only offered new loans to existing customers.

Why would banks turn away customers willing to pay them 18.5%? "We don't have the money to lend," a bank lender told The Post.

Banks were out of money because they were rapidly losing deposits to money market funds, where assets under management surged past $100 billion for the first time in 1980.

It’s easy to see why. In 1981, a savings account at a bank paid 5.25% (the maximum allowed by law) — more than six percentage points below the rate of inflation (as high as 13.6% in 1980).

Savers were therefore switching to money market funds, which paid an amazing 15.7%, according to the 1980 Post article — three times more than a bank account.

Even at that rate, however, savers were probably losing purchasing power after taxes. But it seemed like the only place to hide — and certainly preferable to paying 18% or more for a mortgage. 

It wasn’t.

1980 turned out to be the exact moment to have your savings in almost anything other than a money market fund — it was the start of a multi-decade march lower for interest rates.

Before a 30-year mortgage taken in 1981was paid off in full, interest rates would fall all the way to 0%.

Or lower!

In 2009, Warren Buffett noted that Berkshire Hathaway had sold $5,000,000 of Treasury bills for $5,000,090.07 just a few months before the loan was due to be paid back.

In other words, interest rates were negative: Someone had effectively paid $90.07 for the privilege of lending $5 million to the government.

That shouldn’t really happen. Who pays to lend someone money??

At the time, it seemed like a temporary anomaly born of the Great Financial Crisis. “I’m not sure you’ll see that again in your lifetime,” Buffett said.

But a decade later, fixed-income investors were lending to corporations at negative rates, too, like Henkel and Sanofi. In Denmark, even homebuyers could borrow below zero.

A few decades after banks were refusing to lend at any price, some were paying people to borrow.

Incredible. 

Now, things seem to be normalizing. Mortgage rates hit 7.3% this week, up from 3% five years ago. The yield on 30-year Treasurys hit 5.6%, a 25-year high.

Scary stuff, relative to recent history — but hardly a disaster. Mortgage rates were above 7% for most of the 1990s, after all, and people still bought houses.

But historically normal interest rates will take some getting used to for both markets and the economy.

It’s been a long time since 13% seemed like a bargain.

Let’s check the charts. 

Zoom out:

Mortgage rates inspired some dramatic headlines this week, but today’s 7.30% average only seems high relative to the last 15 years or so.

Zoom in:

As measured by the market for inflation-indexed Treasurys (which might not be the best way to measure it), the market has not changed its expectations for inflation. 

For real?

What has changed is the real return that investors in long-term US debt are demanding. Current prices suggest that today’s 5.6% yield on 30-year Treasurys, held to maturity, will grow your purchasing power by 3.3% a year. Pretty good! (If it really does work out that way, which it probably won’t.)

Blue above black is bad:

This is a little overloaded, but worth spending a minute on because Robin Brooks says it's evidence that the global selloff in government bonds could get a lot worse: “A debt crisis always starts in the most vulnerable places. That's what's happening now. Look at how France's 10-year yield [the blue line] has decoupled above the global rise in yields [the black line].” Other countries with the blue line perilously above the black line include Italy and — gulp — the US.

Can AI do something?

The US national debt has risen above 100% of GDP for the first time since World War II. There seems little prospect of the government either spending less or taxing more. The only other option is for the economy to grow faster than the debt.

The AI bet:

A new study estimates that the AI buildout will cost 3.63% of GDP between 2025 and 2032 — far more than even the 19th-century investment in railroads.  

Crowding out?

AI-related borrowers have accounted for nearly 25% of all corporate bond issuance in 2026, up from less than 5% in 2024. This is contributing to the bond selloff because fixed-income investors only have so much money to lend. Paul Krugman thinks AI borrowing and the war in Iran are the two main drivers of higher bond yields.   

Trend change?

Data from Ramp suggests that spending on AI tokens is down vs. last week and off its highs from a few weeks ago. But only because OpenAI and Anthropic may be starting a price war. Token volumes continue to rise.

Token deflation:

Data from Coatue shows that the cost of AI inference (tokens, basically) has been falling by 50% per quarter since 2023 — far faster than new technologies have done historically.

Another reminder that what looks expensive today can look cheap tomorrow.

Have a great weekend, positive-yielding readers.

— Byron Gilliam

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