Ultimately, Antti expects that by the time the Fed ends its stimulus, the Federal deficit will have fallen far enough that any new Treasury supply will almost match demand from foreign central banks (at least for the next couple years). The bottom line: Even with less Fed buying, modest net new Treasury supply suggests yields won’t rise dramatically in the next year.
2.) Aging demographics. As populations age, real-interest rates tend to be lower. In addition to contributing to slower growth, an older population generally borrows less and has more demand for fixed income instruments.
3.) The still anemic nature of the recovery. With households still deleveraging and corporations flush with cash, there simply is not much demand for capital from the private sector. And as I wrote in a Market Perspectives paper last year, slower growth and less demand for capital have historically been associated with lower real interest rates.
To be clear, I expect interest rates to continue to rise this year and into next. However, given the reasons I cite above, I expect that the rise in yields is likely to be slower and more tempered than many expect.
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.