Forget concerns over interest rates in the United States remaining higher for longer. These have been eclipsed by a new and more pressing fear – that we’re entering an era when rates permanently plateau at a higher level.
After all, 4.5 per cent happens to be the long-term average yield for US government debt since 1790. And bond yields have historically been higher during periods, like the present, when inflation has been high, and the US government has been running massive budget deficits. The sobering new reality for investors who have grown used to interest rates at historically low levels is that the years of when they could borrow money that was virtually free are now over.Adding to the growing pessimism, a growing number of economists are warning that the neutral rate of interest – the level that neither boosts economic activity, nor causes it to slow – has pushed higher.
But the resilience of the US economy in the face of the most aggressive monetary tightening in decades suggests the real neutral interest rate has climbed back to around 2 per cent. To encourage private investors to hoover up this debt, it’s likely the US government will be forced to offer a higher rate of interest on the bonds it issues. At the same time, the Fed is now shrinking its $US8.1 trillion balance sheet, and this will put further upward pressure on US bond yields.
PayPal shares fell 10 per cent last week, while buy now, pay later company Block fell 15 per cent to the lowest level in three years. Online brokerage company Robinhood Markets’ share price dropped almost 9 per cent.Fintechs are seen as more vulnerable to rising rates as higher interest rates will squeeze marginal consumers who are more likely to borrow from a fintech lender, rather than a conventional bank. As a result, there are fears that fintech lenders will see default rates climb higher.