Part 4 : Bond markets: higher US long-term rates and central bank support for credit
The consensus expectation is that rates will remain low for at least four years. Even if the situation improves significantly, central bank rate hikes seem unimaginable before 2022. This does not, however, rule out higher long-term rates
Real interest rates are even lower now than they were before the 2013 taper tantrum, and the spread between long and short rates is still well below historic highs. Should long-term rates rise sharply, the Fed could conceivably intervene to manage the slope of the yield curve without flattening it so much that it no longer supported the financial sector.
In addition to the issuance resulting from the new fiscal support measures, the market will probably also have to absorb a recalibration in its average maturity profile, since the US Treasury issued a large volume of short-dated securities in 2020. Contagion effects could prompt a rise in European long-term rates, albeit to a lesser extent.
Amid very low government rates, the credit segment remains an attractive investment. Credit spreads are approaching their low point of recent years, but the additional yield offered by the riskiest segments is still attractive, with returns close to carry levels. High yield should significantly outperform cash, with central bank purchases limiting the risk of spread widening.
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The opinion expressed above is dated January 2021 and is liable to change. Latest available data as of publication date.
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