The Many Puzzles of Today's Interest Rates

Today's interest rate environment presents a series of paradoxes that confound traditional economic wisdom. From inverted yield curves to mortgage rates that seem disconnected from Fed policy, the current landscape challenges everything we thought we knew about interest rates. This analysis unpacks the puzzles facing borrowers, investors, and policymakers in November 2024.

The Great Disconnect: Fed Rates vs. Mortgage Rates

The Traditional Relationship Has Broken

Historically, mortgage rates moved in tandem with Federal Reserve policy. That relationship has fundamentally changed:

The Old Normal (Pre-2020):

• Fed cuts rates → Mortgage rates fall within weeks
• Fed raises rates → Mortgage rates rise proportionally
• Spread between Fed funds and mortgages: ~1.5-2%

Today's Reality:

• Fed funds rate: 5.25-5.50%
• 30-year mortgage: 7.25%
• Spread: Nearly 2.75% (historically high)
• Correlation coefficient: Dropped from 0.92 to 0.67

At SRK CAPITAL, we're helping clients navigate this disconnect by focusing on what we can control: finding the best available rates in this challenging environment.

Puzzle #1: The Inverted Yield Curve Persistence

Why Short-Term Rates Exceed Long-Term

The yield curve has been inverted for over 18 months—the longest stretch since 1981:

Current Inversions:

• 2-year Treasury: 4.95%
• 10-year Treasury: 4.35%
• 30-year Treasury: 4.55%
• Inversion depth: -60 basis points

What This Means:

• Markets expect economic slowdown
• Yet economy remains resilient
• Traditional recession signals aren't working
• Mortgage pricing models are broken