Longer Term View on U.S. Interest Rates

David O'Malley

By David O'Malley | February 26, 2018

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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This blog post is for informational use only. The views expressed are those of the author, Dave O’Malley, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

Any statements about financial and company performance of The Penn Mutual Life Insurance Company or its insurance subsidiaries (each, “Client”) made by the author is provided with a written consent from the Client.  Penn Mutual Asset Management is a wholly owned subsidiary of The Penn Mutual Life Insurance Company.


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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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