by Ivan Martchev

August 18, 2020

This past week, the average 30-year fixed-rate mortgage rate hit an all-time low. Then the Russians beat the clock on a COVID vaccine, and we had a mild uptick in both Treasury yields and mortgage rates.

Thirty Year Fixed Rate Mortgage Average Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

After speaking with some medical experts, I got the impression that Vladimir Putin wanted the prestige to say that the Russians were the first to develop a COVID vaccine, and to do this they cut some corners. They approved the vaccine before a Phase 3 trial, even though Putin says his daughter got it. Also, the Russians say they had a head start due to their years of work on a MERS vaccine – another coronavirus – where their research produced a COVID vaccine with mild tweaks. I have known for some time that the Russian COVID vaccine had been administered to the Russian elite with the properly signed waivers and monitoring, so this is no complete “cutting of the corners” in the vaccine race by Vladimir Putin.

This is also about a lot of money. If Russia produces a working vaccine in large numbers before anyone else, this would be worth billions of dollars to the Russian Treasury. This very fact caused a surge in global stocks, a sell-off in Treasury bonds and mortgage bonds, and a resulting uptick in rates.

Did that create the ultimate low tick in bond yields and mortgage rates?

We simply don’t know yet. I don’t think this vaccine will be administered in large numbers until 2021, and the same goes for vaccines in an advanced stage of development by Pfizer and a host of other companies, which poses a lot of uncertainties about the U.S. economy, both before and after the November elections.

Navellier & Associates owns Pfizer in managed accounts.   Ivan Martchev does not own Pfizer in a personal account.

Fixed Rate Mortgage and Treasury Constant Maturity Rate Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Right now, the spreads between mortgage rates and Treasuries are elevated, which is normal in a recession. Despite fixed-rate mortgage rates being at all-time lows over the past week, mortgage spreads have gotten as high as they were in 2008-09 and in the year 2000 prior to that. After the recession is over, those spreads will contract, but then Treasury yields may rise again.

How much Treasury yields will rise is impossible to say as the U.S. central bank always has the option to flip them into negative territory with open market operations, as the European Central Bank (ECB) did. Fed Chairman Jerome Powell has already said on more than one occasion that negative Treasury yields tend to backfire in the financial system by depressing the profitability of banks and hurting lending growth.

I think Jerome Powell will keep Treasury yields below the level of inflation, in effect delivering positive nominal yields and negative real yields. That way the profitability of the financial system does not get depressed with nominally positive interest rates, but negative real interest rates makes the record indebtedness in the system easier to service. This is the same playbook that the Fed used after World War II, when the level of Treasury yields was below the level of inflation between 1940 and 1950 in a completely intentional financial repression maneuver to get the economy going after the war ended.

One could argue that deficit spending during WWII helped end the Great Depression and negative real interest rates helped the economy achieve escape velocity after the war. If the Fed and the Treasury had not pulled out all the stops in 2020, it is conceivable that the Covid shutdowns could have caused a second Great Depression as the damage to the economy was more severe than during World War II.

Because of the many moving parts of this equation, I would say that even if Treasury yields go up some and mortgage spreads come down, it is impossible to say ahead of time which one will have a bigger impact. If we have a second coronavirus wave, Treasury yields may decline further, but then mortgage spreads will rise, so it is entirely possible that we saw the lowest mortgage rates for some time.

Because I expect inflation to rise due to deficit spending and negative real interest rates – similar to what we saw in 1940-1950 – I would recommend those in the mortgage market to get fixed rate mortgages now and refinance again if they drop below current levels at a rate that would make it worthwhile to refinance.

Precious Metals Get an Overdue Correction

The news of the Sputnik V Russian COVID vaccine also caused an overdue sell-off in precious metals, which had gone somewhat parabolic. This is normal, as the markets move in zigs and zags. In a bull market, the zigs are bigger than the zags. This move over the past week is your bull market “zag.”

Silver versus Gold Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I think silver is good up to at least $50 per ounce in the next two years and gold up to $2,500 to $3,000. If they go higher, it will be contingent on how hot the Fed lets inflation run, which in 1947 got as high as 19.6%. It probably won’t get that high this time as the U.S. economy is more digital and there is big slack, or an “output gap” now, because of high unemployment and pandemic closures, but I think inflation will go higher in the next three years with the kind of World War II-like deficit spending we have right now.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
A Weak Dollar is Generating a New Round of Inflation

Income Mail by Bryan Perry
It’s High Noon for High Yield Bonds

Growth Mail by Gary Alexander
Sleep Better with “Rip van Winkle” Investing

Global Mail by Ivan Martchev
Could Mortgage Rates Go Lower Than the Last All-time Low?

Sector Spotlight by Jason Bodner
Jesse’s Secret: Sitting on Your Winners

View Full Archive
Read Past Issues Here

About The Author

Ivan Martchev

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

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