The doubling of yields since 2016 has slammed a sector that’s widely viewed to have been well-behaved in this cycle: households. After shrinking balance sheets and rebuilding liquidity during the first half of the expansion, households have managed to borrow their way back into a very precarious position. Thanks to the huge percentage increase in rates, the rise in real interest payments over the last five years is now exceeding that seen at the last three business cycle peaks.

Chart 1

Yes, interest rates are low on a relative basis, which leads many to believe that rates have not yet risen enough to cause economic or stock market trouble. We think this second chart better captures the reality confronting economic and market players. The Treasury bond yield is displayed on a logarithmic scale. The implication is that while market participants might track interest rates on a “point” basis, they respond to them (perhaps subconsciously) on a percentage or proportional basis. (The wreckage among housing and auto stocks supports the view that proportions matter more.)

Chart 2