{"id":23429,"date":"2024-05-08T14:34:34","date_gmt":"2024-05-08T18:34:34","guid":{"rendered":"https:\/\/www.rbcwealthmanagement.com\/en-ca\/?p=23429"},"modified":"2024-05-17T08:54:57","modified_gmt":"2024-05-17T12:54:57","slug":"interest-rate-mood-swings","status":"publish","type":"post","link":"https:\/\/www.rbcwealthmanagement.com\/en-ca\/insights\/interest-rate-mood-swings","title":{"rendered":"Interest rate mood swings"},"content":{"rendered":"\n<div class=\"well b-blue-tint-4 mb-3\">\n      <h2 class=\"h5\">Key points<\/h2>\n      <ul class=\"list-spaced\">\n        <li>\n          Markets have swung from expecting a large number of central bank rate\n          cuts at the beginning of the year to much fewer, and with a growing\n          divergence seen between major global central banks.\n        <\/li>\n        <li>\n          The Federal Reserve has likely shifted from leader to laggard, as it\n          could be the last to ease policy rates. We think that will have its\n          own ramifications\u2014domestically and globally.\n        <\/li>\n        <li>\n          While the rate cut outlook remains volatile, a resumption of rate hike\n          cycles remains highly unlikely. But the recent repricing of the\n          outlook could present another opportunity for bond investors.\n        <\/li>\n      <\/ul>\n    <\/div>\n    <!-- ************* -->\n    <p>\n      Of the four major central banks, [the Federal Reserve (Fed), European\n      Central Bank (ECB), Bank of England (BoE), and Bank of Canada (BoC)], the\n      last to raise rates was the ECB in September 2023. The others have been on\n      hold since this past summer. But given another sharp rise in bond yields,\n      investors would perhaps be forgiven if they believed we were still deep in\n      the midst of central bank rate hike cycles.\n    <\/p>\n    <p>\n      At one point in January of this year, markets had priced in a view that\n      the Fed would be cutting rates nearly seven times in 2024, thereby taking\n      rates all the way down to 3.75 percent from 5.50 percent. It was a similar\n      story globally as deep rate cuts were expected. In a sharp reversal,\n      markets have repriced expectations which now suggest just two rate cuts\n      from the Fed this year, and that at no point over at least the next three\n      years will the Fed cut rates below 4.00 percent.\n    <\/p>\n    <p>\n      As the first chart shows, this idea that any rate cut cycle will be a\n      shallow one has permeated across the central bank landscape. Seemingly\n      gone are the days of zero\u2014or even negative\u2014interest rate policies in the\n      years ahead.\n    <\/p>\n    <!-- ex 1 -->\n    <h3>\n      As central banks edge closer to rate cuts, markets expect a shallow rate\n      cut path in coming years\n    <\/h3>\n    <div class=\"row mb-4\">\n      <div class=\"col-lg-10 col-md-8 col-sm-8 col-xs-10 col-xxs-12\">\n        <img decoding=\"async\"\n          src=\"https:\/\/www.rbcwealthmanagement.com\/en-ca\/wp-content\/uploads\/sites\/5\/2023\/02\/interest-rate-mood-swings-en-chart-1.png\"\n          alt=\"Policy rates for major central banks\"\n          class=\"img-fluid mb-1-half\"\n          aria-describedby=\"chart1desc\"\n        \/>\n        <p\n          class=\"sr-only\"\n          id=\"chart1desc\"\n        >\n          The chart shows the current policy rates for major central banks\n          relative to what market pricing suggests banks will lower rates to in\n          the years ahead, based on forward contract data. In the United States,\n          the current 5.3% policy rate is expected to fall to 4.1%. In the\n          United Kingdom, the current policy rate of 5.2% is expected to fall to\n          3.8%. In Canada, the current policy rate of 5.0% is expected to fall\n          to 3.3%. In the eurozone, the current policy rate of 3.9% is expected\n          to fall to 2.5%.\n        <\/p>\n        <p class=\"footnote\">\n          Note: Long-run market-implied policy rate based on three-year forward\n          contract data.\n        <\/p>\n        <p class=\"disclaimer\">\n          Source &#8211; RBC Wealth Management, Bloomberg; data as of 4\/16\/24\n        <\/p>\n      <\/div>\n    <\/div>\n    <!-- section -->\n    <h2>Such are the mood swings of markets.<\/h2>\n    <p>\n      Inflation, unsurprisingly, is at the heart of the matter. Fading\n      inflationary pressures in the back half of 2023, both in the U.S. and\n      globally, paired with dovish commentary out of central banks, drove bond\n      yields sharply lower. But with the inflation data broadly failing to show\n      further improvement thus far in 2024, particularly in the U.S., sentiment\n      has reversed. As the second chart shows, after falling to multi-month lows\n      this past December, bond yields are now potentially on the cusp of\n      re-testing the decade-plus highs achieved last fall.\n    <\/p>\n    <!-- ex 2 -->\n    <h3>U.S. and global bond yields could retest multiyear highs<\/h3>\n    <div class=\"row mb-4\">\n      <div class=\"col-lg-10 col-md-8 col-sm-8 col-xs-10 col-xxs-12\">\n        <img decoding=\"async\"\n          src=\"https:\/\/www.rbcwealthmanagement.com\/en-ca\/wp-content\/uploads\/sites\/5\/2023\/02\/interest-rate-mood-swings-en-chart-2.png\"\n          alt=\"U.S. and global aggregate index bond yields\"\n          class=\"img-fluid mb-1-half\"\n          aria-describedby=\"chart2desc\"\n        \/>\n        <p\n          class=\"sr-only\"\n          id=\"chart2desc\"\n        >\n          The line chart shows U.S. and global (excluding the U.S.) aggregate\n          index bond yields, which include sovereign and corporate bonds, since\n          December 2021. The U.S. yield is now 5.3%, compared to a period\n          maximum of 5.7%. The global yield is now 2.9%, compared to a period\n          maximum of 3.3%.\n        <\/p>\n        <ul class=\"rbc-legend\">\n          <li class=\"rbc-legend-item\">\n            <div class=\"rbc-legend-line c-blue-tint-2\"><\/div>\n            U.S. aggregate bond yield\n          <\/li>\n          <li class=\"rbc-legend-item\">\n            <div class=\"rbc-legend-line c-dark-blue-tint-1\"><\/div>\n            Global aggregate bond yield\n          <\/li>\n        <\/ul>\n        <p class=\"disclaimer\">\n          Source &#8211; RBC Wealth Management, Bloomberg U.S. Aggregate Bond Index,\n          Bloomberg Global Aggregate ex USD Bond Index; data through 4\/16\/24\n        <\/p>\n      <\/div>\n    <\/div>\n    <!-- section -->\n    <h2>Rethinking the outlook<\/h2>\n    <p>\n      Traders aren\u2019t the only ones reconsidering the path forward for rates,\n      analysts are as well. To wit, RBC Capital Markets made numerous changes to\n      its rate projections over the course of April. Whereby the Fed was\n      previously seen as the first mover, it may now be the laggard.\n    <\/p>\n    <!-- subsec -->\n    <h3 class=\"h6\">\n      Federal Reserve (Current policy rate range: 5.25 percent to 5.50 percent)\n    <\/h3>\n    <ul class=\"list-spaced\">\n      <li>\n        <strong>Previous RBC Capital Markets projection:<\/strong>&ensp;Three\n        rate cuts this year to a rate in the 4.50 percent to 4.75 percent range\n        beginning in June and two more in 2025 in the 4.00 percent to 4.25\n        percent range.\n      <\/li>\n      <li>\n        <strong>Updated projection:<\/strong>&ensp;Just one rate cut this year to\n        a rate in the 5.00 percent to 5.25 percent range in December and two\n        more in 2025 to a rate in the 4.50 percent to 4.75 percent range.\n      <\/li>\n      <li>\n        <strong>Why the change?<\/strong>&ensp;Recent inflation data has been\n        stronger than expected which likely won\u2019t give the Fed the \u201cgreater\n        confidence\u201d that inflation remains on track toward two percent to begin\n        rate cuts by June or July. But while RBC Capital Markets doesn\u2019t expect\n        a material reacceleration in inflation, it\u2019s the presidential election\n        this fall that could give the Fed pause and reason to avoid starting a\n        rate cut process at its September or November meetings, effectively\n        leaving December as the only option for a cut.\n      <\/li>\n    <\/ul>\n    <p>\n      RBC\u2019s call for only two rate cuts to follow in 2025 is, by our own\n      admission, highly uncertain, but predicated on the idea that if the U.S.\n      economy is still humming along by this December, as it has been thus far,\n      then the case for multiple \u201cinsurance cuts\u201d could be a tricky one to make.\n    <\/p>\n    <!-- subsec -->\n    <h3 class=\"h6\">\n      European Central Bank (Current policy rate: 4.00 percent)\n    <\/h3>\n    <ul class=\"list-spaced\">\n      <li>\n        <strong>Unchanged RBC Capital Markets projection:<\/strong>&ensp;First\n        cut in June, two more this year to 3.25 percent, and three more in 2025\n        to 2.50 percent\n      <\/li>\n      <li>\n        <strong>Why is there no change?<\/strong>&ensp;The ECB has given the\n        clearest signals that it continues to move toward a rate cut in June.\n        While inflation has stayed sticky in recent months, economic growth\n        momentum has been slowing while moderating wage pressures should soon\n        begin to drag inflation lower.\n      <\/li>\n    <\/ul>\n    <!-- subsec -->\n    <h3 class=\"h6\">Bank of England (Current policy rate: 5.25 percent)<\/h3>\n    <ul class=\"list-spaced\">\n      <li>\n        <strong>Previous RBC Capital Markets projection:<\/strong>&ensp;First cut\n        in August, three more this year to 4.25 percent, and two more in 2025 to\n        3.75 percent\n      <\/li>\n      <li>\n        <strong>Updated projection:<\/strong>&ensp;First cut in August, but only\n        one more this year to 4.75 percent, and two more in 2025 to 4.25 percent\n      <\/li>\n      <li>\n        <strong>Why the change?<\/strong>&ensp;While policymaker rhetoric\n        continues to guide toward rate cuts, recent data has shown the economy\n        is recovering both earlier and more strongly than expected by both the\n        BoE and RBC Capital Markets, likely justifying a shallower path for rate\n        cuts this year.\n      <\/li>\n    <\/ul>\n    <!-- subsec -->\n    <h3 class=\"h6\">Bank of Canada (Current policy rate: 5.00 percent)<\/h3>\n    <ul class=\"list-spaced\">\n      <li>\n        <strong>Unchanged RBC Capital Markets projection:<\/strong>&ensp;First\n        cut in June, three more this year to 4.00 percent, and four more in 2025\n        to 3.00 percent\n      <\/li>\n      <li>\n        <strong>Why is there no change?<\/strong>&ensp;We think the BoC has the\n        easiest rate-cut case to make amid a murky economic outlook and an\n        ongoing deterioration in labour market conditions, where the unemployment\n        rate is up 1.3 percentage points from the post-pandemic low.\n      <\/li>\n    <\/ul>\n    <!-- section -->\n    <h2>That \u201990s Show<\/h2>\n    <p>\n      One key factor behind RBC Capital Markets\u2019 revised Fed outlook is simply\n      the economic experience of the 1990s. That period has long been held up as\n      the gold standard of Fed policy setting. After a flurry of rate hikes to\n      rein in inflation in the early part of the decade, the Fed simply\n      delivered a handful of insurance cuts in the middle part and the economy\n      continued to run into the early 2000s, a run largely fueled by a tech\n      boom, which should sound familiar.\n    <\/p>\n    <p>\n      RBC Capital Markets\u2019 outlook reflects a similar 75 basis points of policy\n      easing ahead. But whether it also gives way to a resumption of rate hikes\n      in the years ahead remains to be seen. It would be an exceedingly rare\n      example of the Fed actually engineering a soft economic landing\u2014that is to\n      say, raising rates aggressively without inducing a recession.\n    <\/p>\n    <!-- ex 3 -->\n    <h3>\n      RBC\u2019s revised Fed outlook reflects similarities to the 1990s\n      economic cycle\n    <\/h3>\n    <div class=\"row mb-4\">\n      <div class=\"col-lg-10 col-md-8 col-sm-8 col-xs-10 col-xxs-12\">\n        <img decoding=\"async\"\n          src=\"https:\/\/www.rbcwealthmanagement.com\/en-ca\/wp-content\/uploads\/sites\/5\/2023\/02\/interest-rate-mood-swings-en-chart-3.png\"\n          alt=\"U.S. interest rates from 1992 to 2001 and during the current interest rate cycle\"\n          class=\"img-fluid mb-1-half\"\n          aria-describedby=\"chart3desc\"\n        \/>\n        <p\n          class=\"sr-only\"\n          id=\"chart3desc\"\n        >\n          The line chart compares the path of U.S. interest rates from 1992 to\n          2001 to the current interest rate cycle, which began in 2022. In 1994\n          the Fed raised rates quickly from 3% to 6%, while in 2022 and 2023 the\n          Fed raised from 0.25% to 5.25%.\n        <\/p>\n        <ul class=\"rbc-legend\">\n          <li class=\"rbc-legend-item\">\n            <div class=\"rbc-legend-line c-blue-tint-2\"><\/div>\n            1992\u20132001 rate cycle\n          <\/li>\n          <li class=\"rbc-legend-item\">\n            <div class=\"rbc-legend-line c-dark-blue-tint-1\"><\/div>\n            2022\u2013? rate cycle\n          <\/li>\n          <li class=\"rbc-legend-item\">\n            <div\n              class=\"rbc-legend-line rbc-legend-dashed c-dark-blue-tint-1\"\n            ><\/div>\n            RBC Capital Markets forecast\n          <\/li>\n        <\/ul>\n        <p class=\"footnote\">\n          Note: Chart starts 12 months before the first increase of each\n          interest rate cycle.\n        <\/p>\n        <p class=\"disclaimer\">\n          Source &#8211; RBC Wealth Management, Bloomberg; data through 4\/16\/24\n        <\/p>\n      <\/div>\n    <\/div>\n    <!-- section -->\n    <h2>What, why, and how?<\/h2>\n    <p>\n      So, that\u2019s the what and the why of a revised central bank outlook, but how\n      should investors proceed? Another round of rising yields has investors and\n      traders wondering again where the selling stops, and when they should step\n      in and buy. In our view, we are nearing that point. Markets, as they can\n      be prone to do, may have potentially moved from one extreme to another, or\n      from far too many rate cuts priced in at the start of the year, to too few\n      now.\n    <\/p>\n    <p>\n      We still see the bar to resume raising rates as being extraordinarily high\n      for the Fed, and certainly for most central banks, and, therefore, the\n      Fed\u2019s rate guidance from the March meeting should still serve as a\n      reasonable guidepost for how high yields can rise. The final chart shows\n      the benchmark 10-year Treasury yield relative to where the Fed has\n      projected the peak policy rate over upcoming years, as indicated by its\n      Summary of Economic Projections. After another sharp rise in yields to\n      start 2024, how much higher could they go?\n    <\/p>\n    <!-- ex 4 -->\n    <h3>Hitting the ceiling?<\/h3>\n    <h4>\n      Ten-year U.S. Treasury yield likely to hold below the Fed\u2019s rate guidance\n    <\/h4>\n    <div class=\"row mb-4\">\n      <div class=\"col-lg-10 col-md-8 col-sm-8 col-xs-10 col-xxs-12\">\n        <img decoding=\"async\"\n          src=\"https:\/\/www.rbcwealthmanagement.com\/en-ca\/wp-content\/uploads\/sites\/5\/2023\/02\/interest-rate-mood-swings-en-chart-4.png\"\n          alt=\"10-year U.S. Treasury yield relative to the Federal Reserve's outlook for short-term policy rates\"\n          class=\"img-fluid mb-1-half\"\n          aria-describedby=\"chart4desc\"\n        \/>\n        <p\n          class=\"sr-only\"\n          id=\"chart4desc\"\n        >\n          The line chart shows the benchmark 10-year U.S. Treasury yield\n          relative to the Federal Reserve&#8217;s outlook for short-term policy rates.\n          For much of the past decade, the 10-year yield has held below the\n          Fed&#8217;s peak projections.\n        <\/p>\n        <ul class=\"rbc-legend\">\n          <li class=\"rbc-legend-item\">\n            <div class=\"rbc-legend-line c-dark-blue-tint-1\"><\/div>\n            10-year Treasury yield\n          <\/li>\n          <li class=\"rbc-legend-item\">\n            <div class=\"rbc-legend-line rbc-legend-dashed c-blue-tint-2\"><\/div>\n            Peak median Fed rate projection\n          <\/li>\n        <\/ul>\n        <p class=\"footnote\">\n          Note: Shows maximum level of the Fed\u2019s one-to-three-year interest rate\n          projections.\n        <\/p>\n        <p class=\"disclaimer\">\n          Source &#8211; RBC Wealth Management, Bloomberg, U.S. Federal Reserve; data\n          through 4\/16\/24\n        <\/p>\n      <\/div>\n    <\/div>\n    <p>\n      At the Fed\u2019s March meeting, the median forecast of policymakers showed\n      three cuts in the fed funds rate to 4.63 percent this year, roughly where\n      the 10-year Treasury yield currently trades. But if RBC Capital Markets is\n      right and the Fed only cuts once to a mid-point of 5.13 percent, the\n      10-year Treasury yield could potentially trade higher and toward that\n      level. That range\u2014approximately 4.6 percent to 5.1 percent\u2014forms our\n      near-term target level for the 10-year before it begins to fade to 4.30\n      percent by year-end, as RBC Capital Markets currently projects. That\n      framework for thinking about yields relative to central bank policy rate\n      expectations should hold broadly true on a global basis as well.\n    <\/p>\n    <p>\n      For U.S. investors, we now recommend gradually moving out of cash and\/or\n      short-dated bonds and into longer-dated bonds over the course of 2024, but\n      perhaps at a more expeditious pace for global investors with other central\n      banks set to cut earlier.\n    <\/p>\n","protected":false},"excerpt":{"rendered":"<p>April brought the usual spring showers, but it also brought some adjusted central bank rate cut expectations. We examine the what and why of the revisions and explain how investors should proceed.<\/p>\n","protected":false},"author":15,"featured_media":23430,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"rbcwm_post_date":"2024-05-08T09:56:57","editor_notices":[],"rbc_url_alias":"","rbcwm_featured_desktop_image_position":"","rbcwm_featured_mobile_image_position":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[73],"tags":[],"rbcwm_content_owner":[607],"rbcwm_need":[],"rbcwm_segment":[75,66],"rbcwm_solution":[],"rbcwm_topic":[74],"rbcwm_channel":[],"rbcwm_format":[],"class_list":["post-23429","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-analysis","rbcwm_content_owner-pag","rbcwm_segment-business-owners-and-entrepreneurs","rbcwm_segment-individuals-and-families","rbcwm_topic-global-insights"],"acf":{"rbcwm_subtitle":"April brought the usual spring showers, but it also brought some adjusted central bank rate cut expectations. We examine the what and why of the revisions and explain how investors should proceed.","rbcwm_post_author":[1342],"rbcwm_custom_breadcrumb_text":"","rbcwm_custom_breadcrumb_link_url":"","rbcwm_disclaimers":{"add_disclosures":["Yes"],"perspective_disclaimer":"","expandable":"","omit_from_pages":[],"disclaimer_footnote":""},"rbcwm_insight_cta_id":[11937],"rbcwm_pagination":{"next_link":"","next_link_text":"Next article","previous_link":"","previous_link_text":"Previous article"},"rbcwm_video_duration":"","article_time":"","rbcwm_enable_toc":false,"rbcwm_toc_selector":"h2"},"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v24.8 (Yoast SEO v26.8) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Interest rate mood swings<\/title>\n<meta name=\"description\" content=\"April brought the usual spring showers, but it also brought some adjusted central bank rate cut expectations. 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