Higher for Longer

The Bull and his partners have been saying for some time now that longer-term interest rates would need to climb higher. A big part of the reason is that inflation is unlikely to fall to the Federal Reserve’s goal of two percent anytime soon. In fact, we have recited the reasons that this would be difficult: globalization reversing, an aging populace, and more required defense spending, to name a few.

So, the yield on the 10-year U.S. Treasury bond has been climbing. It may go higher yet. In the meantime, short-term rates may have already peaked. The Fed is probably finished with its rate-hiking cycle, although it may not admit it. There is value in keeping markets on guard for the potential of more raises. This may help keep markets more subdued and help with keeping pressure on rising inflation.

Eventually, short-term interest rates will need to fall. They may never fall to the very low levels that were prevalent before the Fed started raising rates, but that is a good thing. Rates were simply too low for too long and contributed to misallocation of capital and the high inflation that followed. Thus, we are now gradually getting back to a more normal rate structure. We will all get used to it. Stay steady my friends.

The Lonely Bull