The widely accepted idea that rates will eventually fall back to pre-pandemic levels...
The thinking is that there’s a “natural interest rate” that controls where the Fed and the market set rates. It reflects the productivity of the economy and the supply and demand for bonds.
The theory among the world’s leading financial institutions is that the natural rate has been trending down for the last few decades and a big reason is an aging population.
This is not just an academic argument. The implication is the US can keep spending because rates — the 10-year is now 3.5% — will eventually fall back to the near-zero rates of the last decade and governments will never have to really reckon with their debt because it won’t cost them much to borrow.
One of the world’s most influential macroeconomists, Olivier Blanchard, recently made this argument.
The private sector also is counting on rates going back down after the Fed vanquishes inflation, which would mean free money and cheap mortgages will be returning soon.
But what if it’s not true? What if the last few decades of falling rates was something of an anomaly and an aging population will mean higher, not lower rates?
Rates trended down the last few decades for many reasons, but a big one was a remarkable period of very low and stable inflation that took the risk premium on bonds to zero.
The theory that an aging population will assure lower interest rates in the future is repeated over and again.
But if we’ve got that backwards, rates could end up being higher, and pretty much everything we thought about bonds will turn out to be wrong.
Allison Schrager Bloomberg 9 februari 2023
Allison Schrager is a Bloomberg Opinion columnist covering economics. A senior fellow at the Manhattan Institute, she is author of “An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.”
https://www.manhattan-institute.org/
A technical-driven rally has made the market deviate from the fundamentals.
“I’ve heard the theories that people say, ‘yes, we understand what should happen, but we’re going look through it,’” Shalett said Wednesday on Bloomberg Television.
“I don’t know how far their crystal ball goes to look through it, but history is not kind to these kind of massive disconnects.”
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