In our view, that story has not changed.
At the same time, cyclically there has been a good case for yields to move higher: Global growth is strong, wages are rising, and the U.S. Federal Reserve is shrinking its balance sheet.
Higher rates could further pressure the equity markets, as investors lower growth expectations and adjust equity valuations lower. Remember, the lack of a market correction in 2017 was an anomaly, rather than the norm.
In our view, a further market correction will not represent the end of this elongated cycle. We believe the end of the cycle will come with heightened U.S. inflation, an inverted U.S. Treasury yield curve, disruption in the high-yield market, and a strong dollar.
It is important to reiterate that the fundamentals of the U.S. economy are currently sound:
- Most U.S. businesses and U.S. households are well positioned for higher rates, as most businesses1 and homeowners2 have already borrowed at low fixed interest rates and pushed maturities off into the future; and
- Financial conditions in the U.S., with the dollar weakening and equities rallying, remain very easy.
Against this backdrop, higher rates are unlikely to be sustained, in our opinion, and U.S. Treasury rates are likely to be well-bid near these levels. We view the cyclical rise in rates as reflective of strong global growth and a modest pickup in U.S. inflation expectation—both of which are likely to be supportive of the equity market.