Longer Term View on U.S. Interest Rates
Given my bearish near-term view on U.S. Treasury bonds, I have recently been asked several times, where do interest rates go over the longer term?
Over the next several years, I continue to believe the upside in yields is limited to approximately 3% on the federal funds rate and 4% on the 10-year Treasury. At this time, I don’t see significant upward risk to yields from these levels because of the sensitivity of the economy to rising yields as a result of global structural deflationary pressures. Assuming long-term U.S. inflation expectations are between 2% and 2.5%, the economy and financial assets will likely come under significant pressure when the real federal funds rate approaches 1%.
Despite this longer term view, I remain cautious on bonds in the short term because of deficit spending and a likely short-term uptick in inflation above long-term expectations.
This week we hear from Federal Reserve (Fed) Chairman Jerome Powell on his outlook for monetary policy at his semi-annual testimony to Congress. Look for any change in the Fed’s view on the economy.
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High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
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