In theory, there’s no difference between theory and practice. In practice, there is.—Yogi Berra
On Friday, an article in the Wall Street Journal highlighted a bizarre situation: the average U.S. homebuyer can now borrow at a lower rate than the U.S. government, which is no doubt creating havoc for leveraged convergence traders. Several observers had comments that indicated how unusual the situation was:
“This is fascinating,” said Michael Shaoul, chief executive at brokerage firm Oscar Gruss, who spotlighted the screwball market action in one of his intraday market notes. “You have, in theory, an impossible event, which is that the man in the street is paying less interest than the government is.”
The hullabaloo was caused by the occasion that a weekly survey of 30-year mortgage rates showed that consumers could borrow at 4.17%, while the federal government is paying 4.24% on 30-year Treasury bonds. As we’ve discussed before, lots of things happen in real life that are impossible in finance textbooks. This is just another one.
Below: an interest rate convergence trade viewed from a safe distance
It goes without saying that it is extremely hazardous to your wealth to assume that something can’t happen just because it hasn’t happened before, or just because it’s not supposed to happen. Assumptions like that can be expensive.
Systematic application of relative strength avoids this assumption completely. Instead of forecasting what will happen, the trend follower simply adapts to trends as they change. Strong in, weak out, and around and around we go.
Correct me if I’m wrong, but couldn’t people then buy houses with cash, and take out a home equity loan, and put that money into bonds to make money?
on 100k loan, ur paying 4.17,and then getting interest from the government at 4.34 ; what am i missing?
Often home equity loans are more expensive (i.e., higher interest rate) than a 30-year mortgage, so it might not work depending on the rate you could get. But I love your idea of arbitraging the Federal government!