“If inflation settles at 2.5%, then central banks are likely to set interest rates around 50 to 100 basis points (bps) above inflation to keep consumer price rises in check,” reads BOS’s 2024 Supertrends: World In Transition report, released at the private bank’s inaugural CIO Summit on July 17. “Investors buying long-term 10Y+ bonds will likely demand a further premium of 50-100bps.”
Thus, 10Y UST yields may trade on average between 3.50% and 4.50% “over the next few years” — “significantly higher” than the 1.00%-4.00% range in the decade after the 2008 Global Financial Crisis, says BOS.
The Federal Open Market Committee (FOMC) is scheduled to meet again on July 30 and 31. BOS’s view is for two cuts this year, down from the Fed’s current range of 5.25% to 5.50%, which it has held steady since July 2023.
Mansoor Mohi-uddin, BOS’s chief economist, forecasts that the first cut will come in September, followed by a second cut in December.
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While the Fed cuts may support risk assets and gold, the US election in November may support the US dollar and yields, says Mohi-uddin. “This makes us nervous about Treasury yields and bond markets,” he adds. “It is increasingly likely that Trump will become president again… [and] long-term bond yields are likely to rise because Trump’s policies are likely to be inflationary.”
Asset allocations
Asset allocations in the 2020s will differ “substantially” from the modus operandi in 2010s, says BOS, if inflation settles above central banks’ 2% targets and 10Y UST yields trade closer to 4.00% on average for the rest of the decade.
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Fixed income investors, for example, will need higher returns to compensate for the risks of higher inflation and elevated UST yields. Similarly, equity investors will be less inclined to favour start-ups and companies that will only generate profits in the distant future if interest rates stay significantly higher this decade compared to the 2010s, says BOS.
In contrast, firms that benefit from higher inflation and interest rates, including miners and financials, are likely to fare better over time, says BOS. The search for security in the new world order is also likely to benefit key sectors, such as technology, healthcare and commodities.
