?How big is big, how high is high?
R* = real interest rate earned (adjusted for inflation). The 30-year treasury is getting crushed.
Risk premia is up. Bloomberg chart (below) shows JGB 30-yr (Japan) is trading at its highest level since 30-year was introduced 26 years ago (right axis/white line).
UST 30-year has pierced 5%, within a few basis points of its highest rate since before the GFC (2008)/when Fed first embarked upon QE.
30-yr UST traded above 6% earlier this century (left axis/blue line), charts shows the potential for gap risk.
With the Fed on the sidelines, the economy beginning to slow, inflation data coming in favorably, the catalyst for higher rates is clear.
It’s fundamental in design; technical in nature as this reaction is simply a function of increasing supply vs. demand.
Questions to consider:
– What’s the forward path for rates?
– Will bond vigilantes drive rates higher, forcing governments to pay considerably higher rates for reckless spending/massive deficit?
– Does leadership (President, Congress) have the will/mandate to reign in deficits creating short-term pain for long-term gain?
– Central Banks can monetize its debt (printing money) via QE
—will/when does this occur? – No significant impact/event as higher rates attract buyers and its mostly status quo despite larger deficits?
– Will high rates soak up global savings, potentially leading to higher borrowing costs elsewhere?
– What will be the impact to most vulnerable companies (REITS, home builders, banks, early-stage growth, consumer finance)?
– Will we grow our way out of these deficits, or must we print/inflate our way out?
– Note: holding all things constant, higher rates is good for credit investors, not so good for equity investors. Capital will flow to asset classes that benefit from this new rate regime.
Not-so-fun fact: U.K. & U.S. are the only G-10 countries with long-rates above 5%.
Fun-fact: Switzerland is the only country with long-rates below 1% (0.54% lowest in the world). Switzerland’s debt-to-GDP ratio is 37%.
Bottom line: Alanis Morissette captures my sentiment perfectly — “I’m high, but I’m grounded.” Interest rates are high, but the U.S. remains firmly grounded as the most liquid and creditworthy economy in the world. So, keep the faith and lean into her lyrics: “Everything’s gonna be fine, fine, fine.”
In this context, fine means Higher for Longer, it’s the Golden Era of Credit. |
