It is probably hard for a whole generation of investors and analysts to imagine a world where 10-year US Treasury yields stay at around 4% to 5% (perhaps even higher) for an extended period of time. But there is certainly a case to be made for interest rates to remain higher than they have been in the past decade and a half since the global financial crisis (GFC).
Have interest rates in the US peaked? And is the worst of stock market volatility, driven by sharply rising yields in the past three months, behind us? The answer to the first question is “Yes, probably” while our prognosis for the second is “No, unlikely”.
For starters, we think markets are overly optimistic in expecting the US Federal Reserve to cut interest rates, as early as May-June 2024, just as they were earlier this year in March, and throughout 2022 (all proven to be premature). And, more importantly, we think investors are underappreciating the impact of the end of the secular decline in interest rates, which has prevailed for the past 40 years or so.
