A recurring theme in our fixed-income view is that the current rise in yields is a return to normalcy. The excess was the low yields after the GFC. It was a form of financial repression used to boost economic growth, but it was also used as a tool to extend government programs through cheap borrowing. This was first and foremost a Fed monetary policy choice, with the fiscal side taking advantage of “free money with rates near the zero bound.
The current rates reflect macro fundamentals. The issue will be whether the market may overshoot with higher inflation expectations and strong risk premia.
We have not seen the impact of this higher cost of capital across all markets. Clearly, the housing market is at a standstill, but business financing will not see higher yields until debt has to be rolled over.
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