The direction of long term rates in an era of high debt

Real interest rates have been on a secular decline since the mid-1980s but have corrected sharply higher since the Covid pandemic, higher inflation and the end of central banks’ Quantitative Easing (QE). Now, public debt is much higher and there are new demands for funding (e.g., for defence and net zero ambitions), which should argue for structurally higher long-term interest rates. Yet numerous empirical studies find that the secular decline in real rates is due to adverse demographics and declining productivity (at least in the advanced economies), which are expected to continue.

Abstracting from the current bout of sharply rising yields triggered by the sea change in Germany’s fiscal policy, what would constitute a prudent capital market assumption over the long term for asset allocation and the expected returns of the main asset classes?

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