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Your Golden Handcuffs are the Banking System’s Golden Guillotine

 Golden handcuffs refer to anyone who borrowed at 3% mortgage rates and how they’re unlikely to roll that mortgage into a 7% mortgage. That 3% mortgage rate looks like the deal of a lifetime compared to the new normal and so holders of those low rate mortgages feel “handcuffed”. 

But there’s always a counterparty in these transactions and your Golden Handcuffs are a Golden Guillotine for the counterparty of that loan.

The basic thinking here is that someone holds the other side of that golden handcuff trade. And in a world with 5% inflation that 3% mortgage payment is sucking wind. This is the crux of all the mark-to-market losses that banks and other investors are sitting on.

In short, the Fed raised rates to combat inflation and as rates rise, bond prices fall. So all of these bonds have been re-priced lower to reflect the new interest rate regime.


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