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In this video, Dagmara Fijalkowski shares four reasons to suggest that interest rates are unlikely to move higher over the next year. Among other factors, post-election implications for monetary stimulus and economic recovery seem to indicate that rates will remain low in the near term.

Watch time: 2 minutes 39 seconds

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We believe there are four reasons that rates are not going to go higher over the next year or so.

First is that central banks are intent on keeping real rates negative in order to help the economies overcome the ravages of COVID and lockdowns, and recover.

Reason number two is that global stock of negative yielding bonds is yet again at the high level of $17 trillion, which means the U.S. Treasuries are attractive for foreign investors. Japanese, European investors. Even on a currency-hedged basis, they produce higher yield than very domestic bonds.

Reason number three is that inflation expectations are likely to persist at very low levels over the next couple of years. And that’s because of what COVID did to demand shock because of high unemployment, because of low oil prices. All of these are reflected in inflation-linked bonds, which price break even inflation for 5-, 10-, and 20-year time horizon below 2%.

And finally, the fourth reason. Post-election as odds of substantial fiscal stimulus package have dropped with results of [a] split White House and Senate. The odds of monetary policy adding additional stimulus have increased. Whether this is by extending of time, or scope, but we believe that central banks are likely to add to very monetary stimulus.

So for these four reasons, we believe that U.S. Treasury yields are likely to stay low or move even lower over the next year.



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Recorded on November 17, 2020

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