Bank of America strategist warns higher rates could threaten markets
Bank of America interest-rate strategist Mark Cabana says US borrowing costs may be approaching levels that could damage economic growth and financial markets. He expects rates to rise further, while Australian superannuation funds face exposure through investments in US shares and bonds.
Bank of America interest-rate strategist Mark Cabana has warned that global borrowing costs may be approaching levels capable of causing financial damage, with implications for markets and Australian superannuation funds. The US Federal Reserve’s benchmark rate is currently in a range of 3.75% to 4%, after a quarter-point increase. Cabana said rates were not yet restrictive enough to significantly slow economic activity.
He said recent selling in the US bond market had pushed yields to multi-decade highs, although the move had not yet caused steep falls in asset prices. Bond yields rise when prices fall and can also increase when investors anticipate higher central-bank rates. Cabana expects rates and bond yields to continue rising and the US yield curve to flatten.
He said a policy rate of 4% to 4.25% could approach an economic and financial danger zone, while rates in the high 4% or mid-5% range would create greater concerns about tighter financial conditions and slower growth. Goldman Sachs has moved its forecast for the next US rate increase to December after a weaker-than-expected inflation reading reduced expectations of an October move. The developments matter to Australia because superannuation funds hold tens of billions of dollars in US assets, including shares in major technology companies.
Australia’s 10-year government bond yield has reached its highest level since 2011, while the housing and share markets have cooled from earlier levels. Cabana said Australian super funds were closely focused on when rates would become restrictive. If US growth continued and inflation pressures persisted, he said rates might need to rise to 5% or 5.5%.
VanEck strategist Anna Wu offered a less negative view, saying the artificial-intelligence investment boom could outweigh short-term market volatility. She said current yield increases appeared to reflect expectations of stronger growth rather than runaway inflation. Reserve Bank governor Michele Bullock has said a significant economic slowdown might be needed if inflation expectations became unanchored.
The source material presents that risk as a concern shared by Cabana and Bank of America.
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