Investors Need to Worry About the Bond Market’s Return to Normality
loan default rates, weaker demand to borrow and a sharp tightening of lending standards by banks. So far, only the very weakest borrowers have hit trouble. It is true that after super-easy postpandemic lending the latest moves could just be a return to normal default rates, not the start of a big jump.
Equally, some business models have been restructured or abandoned, with loss-making startups changing tack to stem losses, investors have pulled back from private equity and the smallest and most-leveraged stocks are still having a bad time. Maybe only minor restructuring is required to adapt to the new world of higher rates. But the risk of bigger problems should be a serious worry for everyone.
The economy was mainlining cheap money, and the withdrawal symptoms have only just started. Second, many of the reasons for the upward shift in real yields aren’t about growth, but about changes to the world that make it more inflationary at any given level of growth, meaning higher rates are needed just to stand still on inflation. If the economy has become permanently more inflationary even than it was in the 2000s, then the Fed will have to run with higher real rates to hit its target.
Perhaps higher real rates aren’t about decent long-run growth prospects, but weak growth combined with deglobalization, more military spending, catch-up infrastructure investment, green subsidies and all the other inflation-inducing policies that politicians have suddenly come to love. If government rules and subsidies mean more investment dollars or more expensive workers are needed to produce the same output, inflationary pressures rise even as living standards don’t. There may be good reasons: containing China or mitigating global warming are
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