Markets think interest rates could stay high for a decade or more

livemint.com:

NOT LONG ago, as interest rates in the rich world hovered near zero, economists debated whether their downward march was the product of a decades-, centuries- or millennia-long trend. Now the burning question is how long they will stay high. On October 18th the ten-year Treasury yield, which incorporates long-term expectations for interest rates and was below 1% as recently as 2021, hit 4.9%, its highest since 2007.

The 30-year Treasury yield crossed 5% the same day. Analysts at Bank of America may have sounded a little breathless when they declared last month that rates were “coming off 5,000-year lows". But that is indeed how it feels to economists, investors and anyone in the uncomfortable position of servicing debts they incurred when almost everyone expected rates to be low for ever.

The conviction that rates will remain “higher for longer" is spreading around the world. The euro zone saw negative interest rates in 2021; now Germany must pay nearly 3% to borrow for a decade. Britain’s bond yields are nearly as high as America’s.

Even Japan, whose apparently permanently low rates were seen as a harbinger for the rest of the world, has faced upward pressure on its bond yields (see chart 1). Bets that its central bank will have to raise interest rates in 2024 for the first time since 2007 are mounting. If markets are right, a new era is beginning and the consequences will be far reaching.

Households and companies will have to pay much more to borrow. The financial system will have to adjust to a painful new reality. And governments will find they have to divert more tax revenue to pay the interest on their accumulated debt.