Expectation inertia is a powerful force. Thirty-year Treasury yields went above 5 per cent in 2023 before heading back down. But in the last couple of weeks, as the same thing has happened, investors finally seem to be accepting the notion that America is leaving the era of lower interest rates, and entering a new world with many more inflationary vectors than in the past.There are multiple reasons for this — from higher energy and goods prices related to war and tariffs, as well as re-industrialisation and rising defence spending, to the way in which AI giants are gobbling up real estate, chips, water and electricity, raising the price of these things across the economy at large. Lower demand for all those US Treasuries doesn’t help either.
Then there are the slower drip issues such as rising debt, geopolitical strife and populism. These risks mean that lenders want a higher premium for shelling out their money over the next few years.
Taken together, the message is clear. “Investors should position for a persistently higher rate environment” for the short, medium and longer term, according to a recent client note from Apollo chief economist Torsten Sløk.