For fixed income investors, the need for attractive yields and positive returns is ever present. However, the landscape is more challenging now given uncertainty over the US Federal Reserve (Fed) rate rise cycle.
Too much media attention has focused on the timing of the first rate hike, whereas the important questions for long-term investors are:
1. What is the “neutral” rate for interest rates in the US?
2. How quickly will we get there?
In the US, markets are pricing in higher short-term rates over the next five years, rising to around 2.5% – significantly less than the Fed’s expected neutral rate of 3.5%. However, there is not much change expected in longer-term bond yields. This reflects the increased acceptance of ‘secular stagnation’ or a sustained period of low nominal growth.
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