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Peter Schiff says the bond selloff that lifted U.S. borrowing costs to a 24 year high is only beginning. He warned Kitco News anchor Jeremy Szafron that Washington could eventually repay lenders just 50 cents on the dollar.

The 10 year Treasury yield touched 5.35%, its highest level since 2002, before easing after a $39 billion auction. The resulting 5.3% auction yield was the highest since 2000.

Mortgage rates have followed borrowing costs upward. The average rate on a mortgage with a 30 year term reached 7.49% in the week ended Oct. 2, its highest since November 2023, according to the Mortgage Bankers Association.

Schiff rejected the idea that the bond market was bluffing. "It's not really about a bluff. It's the chickens finally coming home to roost," he said.

"This is not the end of this move. We're probably closer to the beginning," Schiff said. He believes the 40 year bull market in bonds ended in 2020 and 2021.

Freddie Mac's average mortgage rate for a 30 year term fell from 18.63% in October 1981 to 2.65% in January 2021. Schiff now expects a secular bond bear market that could last about 20 years, with rates potentially rising faster than they fell.

"We could be looking at 9% mortgage rates maybe by the first quarter of next year," he said. Schiff also expects nationwide home prices to fall 30% to 50%, potentially matching or exceeding the decline of 2007 and 2008.

He said the refinancing channel that once allowed homeowners to extract cash has disappeared. "The refi is dead. Home equity extractions are over," Schiff said. "So there's no more lifeline."

Schiff describes the United States as occupying a fourth quadrant marked by high debt and high interest rates simultaneously. Low rates previously made the federal debt burden more manageable, but that condition has ended.

He sees inflation or restructuring as Washington's two possible paths. "I think there is a reasonable probability that the government will default," he said. "It's more likely to be a restructuring where they say, 'OK, you get 50 cents on the dollar.'"

Net interest on the federal debt is already about $1 trillion annually, according to the Congressional Budget Office. Schiff believes it could reach $3 trillion to $4 trillion in a few years as older debt is refinanced at higher rates.

He also criticized Treasury plans to buy back up to $6 billion of bonds maturing between 2047 and 2056. Schiff characterized the strategy as an Operation Twist that retires long term debt while issuing short term bills.

Gold fell nearly $100 an ounce at Wednesday's low as yields climbed, while spot prices hovered near $4,100 during the interview. That remained well below January's record above $5,500.

Conventional market thinking holds that higher bond yields weaken demand for gold because the metal pays no interest. Schiff sees the opposite signal in collapsing bond prices and mounting losses for investors holding government debt.

"It's the most bullish thing that could happen to gold and silver because what these rising bond yields show is that bond prices are collapsing," he said. Schiff argued that investors selling bonds may direct the proceeds into gold or silver.

He blamed recent weakness in gold on trading algorithms programmed to sell when rates increase. Schiff also noted that gold and interest rates rose together during the 1970s, arguing that the crucial issue is whether rates keep pace with inflation.

Central bank demand has persisted. China's central bank reported adding about 23 tonnes in September, its 23rd consecutive month of purchases, while central banks worldwide bought a net 39 tonnes in August, according to the World Gold Council.

Russia's central bank has sold 56 tonnes this year, according to the council's data. Schiff said gold serves as a reserve that a country at war can access when it needs cash.

Delegates at the London gold market's annual conference placed gold near $5,000 a year from now. Schiff believes that level could arrive sooner, possibly following a crisis that causes the Federal Reserve to stop tightening.

Silver has settled around $60, above the old double top near $50 that it failed to clear in 1980 and 2011. "I don't think $125 an ounce was the high. That was just the initial breakout point," Schiff said.

Schiff holds substantially more of his own money in mining stocks than in physical bullion. He favors royalty companies and junior miners, which he believes could lead the next advance.

For ordinary savers, Schiff called holding a U.S. bond fund a mistake and preferred money markets for cash. He also advised buying nonperishable groceries early to avoid future price increases.

Americans expect 3.9% inflation over the next year, according to a New York Fed survey. Schiff expects a higher figure and warned that growing borrowing by major technology companies to finance AI infrastructure is adding competition for capital.

Despite his warnings, the Treasury auction drew strong demand, with primary dealers receiving just 2.5% of the notes compared with a 9.4% average. BMO called the auction "strong."

Federal Reserve policymakers unanimously raised rates in September to a range of 3.75% to 4%. Traders on Kalshi placed the probability of another increase before year end near 78%.

Schiff favors addressing the debt through an upfront restructuring rather than allowing inflation to erode repayment value. "But that's a real 50 cents. That's better than getting a dollar that's worth 20 cents," he said.

DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.