This rate has been in steady decline across the developed world. “What’s been driving the longer part of the curve is an expectation that once central banks start raising rates they won’t be able to get anywhere near levels they got to in prior hiking cycles,” said Barnaby Martin, head of credit strategy at BofA.Ĭrucial to estimating the terminal rate is the natural or neutral rate, sometimes called r-star – the equilibrium level of rates where full employment co-exists with stable inflation. And yields remain stubbornly low on long-dated bonds – 10-year Treasuries peaked just below 1.8% this year. yields – currently at minus 1% on the 10-year benchmark – will need to stay sub-zero for years, if not decades. Corporate bond risk premia are historically low, while cumulative household, corporate and sovereign debt rocketed $36 trillion during the pandemic.įor this reason, many reckon real U.S. “Bond markets are saying … we will hold long-end yields low because we think (rates) will rise, then come straight back down again.”Ī trillion dollars have poured into global stocks this year – more than the prior 19 years combined – taking share price valuations to ever new highs. “What equity markets are saying (is) … interest rates won’t get very high and real yields will stay low,” said Craig Inches, head of rates and cash at Royal London Asset Management. It’s a similar picture in the euro zone and Britain, where terminal rates are seen just above 0% and just below 1% respectively. That bet, which is lower than the 2.5% the Fed itself projects, reflects the belief that policy tightening may end before interest rates hit the Fed’s 2% inflation target. rates in five years, a proxy for the terminal rate EDZ26. But the upcoming cycle will end below 2%, according to euro-dollar futures’ view of U.S. The previous Fed rate hike cycle peaked at 2.25%-2.5% in 2018. In a world where bonds, on an inflation-adjusted basis, yield far below 0%, there is simply no alternative, investors say.Īnd those negative “real” yields, alongside stubbornly low longer-dated government borrowing costs, flattening yield curves and soaring equities, all rely on the view that terminal rates – or where central bank policy rates will peak – will be lower than in previous cycles. Stock markets have been mostly unfazed by rate rise talk – equity funds have seen inflows every week this year, save two. But Fed boss Jerome Powell’s most recent comments indicate he is on track to raise rates several times in the next two years. Federal Reserve and other central banks will go nowhere near as far as it did in the past.Ī fresh bout of COVID-linked uncertainty has seen markets backtrack slightly on the hefty rate hikes priced in next year from the Fed, Bank of England and others. A build up of bets on rising interest rates has done nothing to derail a stock market rally based on conviction that policy tightening by the U.S.
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