Interest Rates: A Growth Story

Interest rates in the US are at levels never seen before. Companies gorge on debt as their cost of debt capital declines. Meanwhile, income-focused investors and savers yearn for the security of higher levels. Monetary policy certainly abetted the achievement of these levels. The reality is that another factor is complicit in the conspiracy to lower interest rates: growth. Before the yield suppression of the 1940s and the inflationary disconnect of the 1970s led them on a different path, real Treasury yields walked with real growth for decades. That relationship returned over the last four decades. Before the Pandemic, the expectation was that the increasing productivity of the Millennial generation would modestly lift real rates. Without an effective policy response, that outcome is doubtful and could repress real rates for decades. Investors are forewarned that this time is not different.