Interest rate turnaround: returns above five percent signal the end of the cheap money era
Quick Look
- Ten-year U.S.
- Treasury yields rose to as high as 5.3 percent, the highest since 2002, after the worst quarter for bond markets in 30 years.
- This increase is challenging equity valuations, tightening credit conditions and offering better conditions for savers.
AI-generated summary
Why It Matters
Ten-year U.S. Treasury yields rose to as high as 5.3 percent from 3.96 percent at the start of the year, the highest since 2002, after the worst quarter for bond markets in 30 years.
Welcome to the new world of interest rates! A financial system with returns beyond five percent marks the definitive end of the era of cheap money, and this paradigm shift will fundamentally alter conditions in global markets. Solid growth rates and robust corporate profits, especially in the USA, are still cushioning the rapid rise in yields of the past few weeks. But that can change quickly.
The epicenter of the quake is in the USA. The bond markets there have had their worst quarter in 30 years. The yield on ten-year government bonds climbed to up to 5.3 percent, the highest level since 2002. For comparison: at the beginning of the year, US yields were still at a significantly low 3.96 percent.
The rapid increase in yields means that all other asset classes must deliver significantly higher returns in order to compete for investors' capital. This calls into question the valuation of stock portfolios, tightens the conditions for borrowers of all stripes, from governments to companies to consumers, and at the same time offers significantly better conditions for traditional savers.
What to Watch
AI outlook — possibilities, not facts
The US Federal Reserve is expected to raise interest rates further or keep them high for longer to combat inflation.
Likely · Within months
Open Questions
- How long will the period of high returns last?
- What long-term impact does this have on global growth?
