Investors are starting to price in the rising probability of this new reality — by demanding higher returns on longer-dated Treasuries. Yields for the benchmark 10-year US Treasury broke above 4.8% while the 30-year bonds surged above 5%, the highest levels since 2007, just before the global financial crisis (GFC).
The US stock and bond markets have finally capitulated to a “higher-for-longer interest rate” scenario. For the longest time, investors remained convinced that the US Federal Reserve would cut interest rates sooner rather than later, even as Fed officials repeatedly insisted otherwise. (Because of this, long-term interest rates lagged short-term rates, resulting in the much talked about inverted yield curve). Over the past few weeks, however, something broke. As the job market and economy continued to show remarkable resilience, which would most likely result in the Fed keeping interest rates high longer than expected, expectations are now shifting, rapidly.
We have explained in previous articles why cash, which has been trash for more than a decade, is now king. With short-term yields well above 5%, cash and short-term money market funds are, once again, legitimate investment options. Real returns (after inflation) are positive and, with minimal risks, this asset class has become increasingly harder for portfolios to ignore. And it is sucking money out of risky assets, which were the TINA (there is no alternative) investment when interest rates were low and falling. We think the era of extreme low interest rates has ended.
