A recent Wall Street Journal article examined why economies have remained relatively resilient despite elevated interest rates and what that could mean for the bond market.
One explanation is that the “neutral rate” may be higher than it was before the pandemic. The neutral rate is the interest-rate level that neither stimulates nor slows economic growth.
Several factors may be contributing to this shift:
• Continued economic growth despite tighter monetary policy
• Higher levels of government borrowing
• Increased investment in artificial intelligence and infrastructure
• Productivity improvements that may allow economies to handle higher rates
For fixed-income investors, a higher neutral rate could mean that Treasury and corporate-bond yields remain elevated for longer than previously expected. It could also affect bond prices, portfolio duration, refinancing costs, and the relative appeal of short versus long-term securities.
The key question is whether the economy’s resilience reflects a lasting structural change or a temporary response to current conditions.
Source:The Wall Street Journal
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