During the first week of the year, the interest rate on US government debt with a maturity of ten years, often referred to as ten years, rose sharply. The ten-year-old approached 1.8 percent towards the end of this week, the highest level since the spring of 2021. That’s a significant increase from just last month, when the interest rate was 1.3 percent.
The ten-year-old is often referred to as the “world’s hottest interest rate” because it is a reference to many interest rates, but also other financial variables, around the world.
Interest rate and currency analyst Ingvild Borgen Gjerde at DNB Markets explains that the rate hike is partly related to expectations that the US Federal Reserve (Fed) will soon raise rates.
She envisions the 10-year-old will continue to rise for the time ahead, but the pace depends on how aggressive the Fed is with raising rates.
She points out that if the Fed rate is adjusted gradually, the rise in the 10-year period will not be as abrupt as it was this week, and markets may not be affected significantly. However, if the rise in the key policy rate is too rapid, it may have negative effects on the market.
– With the low interest rates we’ve had in the last couple of years, and with a lot of liquidity circulating as a result of money pressures from central banks, financial markets are becoming more interest rate sensitive, big and saying a move in a short time is likely to lead to downturn and stock market volatility.
This week, higher interest rates contributed to the decline of the Nasdaq tech exchange, which is down more than four percent for the week. An increase in long-term interest rates is often negative for so-called growth companies, which are companies that are priced based on future earnings. So the Nasdaq often fluctuates in line with interest rates because many technology companies are considered growth companies.
Earlier this week The minutes of the December meeting of the Federal Reserve have been released.
After repeating that inflation was temporary for several months, it emerged that many members were expressing concern about high inflation. The report contained strong signals that the Fed may tighten monetary policy sooner than expected, in order to keep pace with rising inflation. It was discussed that the central bank may have to raise interest rates earlier and faster than previously indicated.
Gjerde believes that the rate hike in recent days may be due to indications from the Federal Reserve that the key policy rate could be raised faster than expected.
– Gerdy says the main reason for the increase in the 10-year-old US in recent days is that investors have revised their expectations of how much the Fed will raise its key interest rate.
In addition, members discussed opportunities to begin reducing the Fed’s balance sheet after the first rate hike. The central bank’s balance sheet has risen sharply as a result of the Federal Reserve’s purchase of securities throughout the Corona pandemic.
Gerdi notes that the increase in age of 10 in recent days has been significant.
Movement, by 0.2 percentage points over three days, is significant compared to normal. Perhaps this is due to some technical factors related to us entering a new year, says Gerdi.
Interest rate differential decreased
And despite the increase at age 10, the difference between her and the two-year-old has increased since last fall. Two years is the interest rate on US government debt with a maturity of two years, and is considered a “short-term interest rate”.
Erica Blomgren Dalstø, chief strategist at SEB, believes the reason for the lower spread is increased expectations that the central bank will raise the key rate.
Market-based inflation expectations are not alarmingly high, while expectations for rate increases have risen sharply, she says.
Daltsø explains that key policy rate expectations affect short-term interest rates more than long-term ones.
In other words, the market expects the Fed to eventually curb inflation by raising interest rates dramatically over the next two to three years. Therefore, long-term interest rates have not risen as much as short-term interest rates, and the yield curve has flattened, says Daltso.
On the other hand, if the difference between a ten-year-old and a two-year-old is negative, which means that long-term interest rates are lower than short-term interest rates, then the interest rate curve will invert. The inverted yield curve has historically been a warning of economic downturn. Over the past 50 years, the yield curve has inverted before every recession.
Daltzo asserts that this is not the case now.
Historically, an inverted yield curve signaled a recession, but we haven’t hit it yet, she says.
A recession means a severe economic contraction, and is defined by the economy contracting for at least two consecutive quarters.
Negative for the stock market
Portfolio manager Marianne S. Lind in Odin said that the ten-year-old would continue to rise in the future.
Given that the interest rate level is still very low in a historical context, the risk is to the upside, says Lind.
Lind explains that higher long-term interest rates are negative for stock markets, and especially for certain companies.
Higher interest rates are in themselves a negative for the stock market — they contribute to higher borrowing rates and lower prices, especially for companies that have a lot of cash flow somehow in the future, Lind says.
Lind advises investors to invest in companies that generate profits when long-term interest rates are rising.
Looking at market prices, it seems reasonable to focus on high-quality companies with strong business models, which can do well through higher interest rates or a stock market downturn, she says.
Affects interest rates in Norway
Developments in the US 10-year period are also affecting long-term interest rates here in Norway.
Norwegian short-term interest rates, which determine variable mortgage rates, are determined primarily by the Bank of Norway’s policy rate. But long-term interest rates, which set fixed interest rates, are further driven by developments in the United States
DNB’s Gjerde explains that long-term interest rates in the US are more important to long-term interest rates in Norway than what is expected of a key rate here at home.
Norwegian long-term interest rates follow similar interest rates in the United States closely. In fact, long-term interest rates in the United States are more important to long-term interest rates in Norway than, say, the Norges Bank’s key interest rate forecast, says Gerdi.
In the last month, the Norwegian government’s interest rate with a ten-year maturity has also increased significantly. On Friday, it was 1.79 percent. (Conditions)Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases using a link that leads directly to our pages. All or part of the Content may not be copied or otherwise used with written permission or as permitted by law. For additional terms look here.
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