Interview, Fireside Chat
Why Rates Could Keep Rising
- Inflation persistence driven by oil prices, tariffs, and AI cycles is projected to maintain Fed caution and investor demand for higher real yields, creating an environment where the central bank remains on hold longer than previously anticipated.
- Resilient economic growth suggests rates will stay restrictive for an extended period, with the central pivot shifting from questioning the timing and magnitude of future cuts to determining the duration of the current pause.
- Fiscal deficits running between six and eight percent in the U.S., U.K., and Japan, combined with high supply, are expected to elevate fiscal premiums and increase term premiums as investors demand greater compensation for long-duration risk.
- Global spillover effects from rate slippage in the UK and Japan are forecast to continue impacting U.S. markets, while Treasury supply and other factors are expected to further drive rates higher, particularly at the back end of the yield curve.
- Market pricing currently anticipates approximately 30 basis points of cumulative rate hikes by 2027 rather than cuts, with a specific prediction for a bear steepener where 30-year yields rise significantly while 5-year yields remain stable or decline slightly.
- Mortgage rates approaching 6.5% are expected to stifle the housing market, slowing home sales and creating gridlock for builders if demand does not recover, while the 30-year Treasury rate is viewed as a potential entry zone near 5%.
- Consumer weakness is anticipated as the effects of tax refunds fade, gas prices rise, and health care subsidies expire, leading to reduced personal consumption and declining savings rates.
- Portfolio strategies are expected to favor a 60-40 allocation utilizing "dynamic patience" to capture carry while awaiting macro clarity, avoiding major directional macro bets amidst high uncertainty.