Over the past few weeks, interest rates have begun to increase faster than expected. The yield on the 10-year Treasury has risen from 0.93% at the beginning of December to above 1%. That means that since August of last year, when the 10-year yield hit 0.5%, interest rates have more than doubled.
I have been looking at the 30y treasury bill rate and it seems like it is getting close to 2%
I think there are a few reasons why this is important for investors. Firstly, it means debt is more expensive. For both the U.S. government and corporate borrowers, the cost of borrowing money is rising.
Many analysts expect interest rates to continue to increase over the next year as a normal part of the economic cycle. When the economy is improving, it is essential to increase interest rates in order to avoid inflation spiralling out of control.
Increased economic stimulus and borrowing could drive rates higher, and while this would be positive for many companies on a fundamental level, it is bound to hit equity valuations.
This is one of the risks investors need to be aware of as interest rates continue to grind higher. In past market downturns, it wasn't as much of a concern, but this time around we have seen the rather unique phenomenon of a stock market bull run during a major global economic recession, which puts quite a different spin on things.
The financial markets often do what we least expect as the highest probability scenarios are already priced in, and that's where I believe we stand today, with a majority of investors pricing in lower for longer on the interest rate front, which is evidenced by the euphoric price action in the large-cap growth stocks, including recent heavily oversubscribed shares of initial public offerings.
Against this backdrop, commodity prices are signaling that we are on the cusp of higher than expected future inflationary pressures. This could very well lead to the specter of a burst broader equity market bubble and a burst bond market bubble that potentially casts a pall over the broader investment landscape?
What are your thoughts about where is this going? I have been under the impression that the Fed will keep the interest rate low for many years but this seems contradict to what’s happening. Thoughts?
Submitted January 08, 2021 at 04:16PM by DaenyxBerlarys https://ift.tt/3q32I8p
