U.S. real interest rates are currently near historic lows, and many institutions expect them to rebound modestly in 2021. But in its latest research note, Goldman Sachs warns of the possibility of real interest rates rebounding at a faster-than-expected pace and the potential impact it could have as an anchor for global asset pricing.
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Goldman Sachs said the most likely catalysts for the current rapid recovery in real interest rates are “policy-driven,” from market expectations of shifts in monetary and fiscal policy, and “growth-driven,” from the market’s response to improved economic growth. The bank reviewed the three periods of real interest rate spikes in the U.S. over the past 15 years and found the following obvious commonalities: 1.
- usually followed a significant decline in real interest rates; 2. occurred against a backdrop of improved economic growth expectations; 3. were usually accompanied by a significant shift in Federal Reserve monetary policy, or fiscal policy.
But for the market, “growth-driven” and “policy-driven” which dominates is critical.
Goldman Sachs believes that if, as in the recent past, expectations for improved economic growth remain firm, then the rapid rise in interest rates may bring temporary anxiety to the stock and credit markets, but the long-term impact is relatively limited. By contrast, “policy-driven” led changes in real interest rates tend to be more disruptive.
The broader global context also affects the sensitivity of assets to changes in real interest rates. For example, during the “tapering scare” in 2013, the slowdown in growth in some developing countries caused real interest rates to rise in the U.S. while global emerging market assets and commodities came under significant pressure. And in the late 2015-2016 round of real interest rate recovery when global growth expectations improve, asset performance is much better.
Specifically on the current stock market, Goldman Sachs has found that the sensitivity within U.S. stocks to economic growth and real interest rates has changed significantly during the Epidemic. While bank stocks have been outperforming, technology stocks have underperformed during a period of sharply higher economic growth and real interest rate expectations, a phenomenon that has only recently emerged. Goldman Sachs expects that the fragile reaction of technology stocks to higher real interest rates will continue for now.
As for ways to deal with high interest rate risk, Goldman Sachs says the easiest is still to invest in U.S. Treasuries. At the same time, having the portfolio tilted toward areas that are less sensitive to interest rates, or putting some of the money into Gold and the yen, may also help.
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