Taking a look at #InterestRates – Research Highlights

Editorial Team OpinioPro
By April 9, 2021 14:55

Taking a look at #InterestRates – Research Highlights

Taking a look at #InterestRates – Research Highlights

In a recent publication by Janus Henderson they ask the question if the recent rise in rates is sustainable. They state that the recent rise in rates has made a couple things clear, namely: The recent rise is undoing the even faster decline from last year and secondly that the initial rise was due to a higher breakeven inflation, which was followed by higher real rates. Janus Henderson does not think that a structural regime shift towards higher inflation is currently happening, the high unemployment and wide output gap cause it to take time before there is any cause for inflationary concern.

Janus Henderson thinks that inflation will peak somewhere during spring in the US, data shows that many of the underlying inflation measures are trending lower, which reinforces the idea that the Fed has no reason to respond. Some of the key ingredients for long term inflationary trends are missing, namely: wage inflation and credit creation.

According to them the situation would be more concerning if there were more ‘disorderly and correlated markets’ or continuing tightening in financial conditions due to higher real rates. The most important risk to look at is the amount of investor outflow that will happen due to negative year-to-date return.

In another article, by Principal, the interest rates are linked to real estate through the question: “Interest rates are rising, should real estate be concerned?”. Principal starts with an analysis of the historical relation between interest rates and property returns, which over a 40-year period suggest a broadly positive relation. Apartments show the highest positive correlation and hotels show the weakest positive correlation. Historically the NPI all property index has outperformed 10-year treasury rate by 76% of the time.

They expect that a higher interest rate will make investors require a higher risk-premia from property types where growth is pressured. Principal expects that CBD office, hotels, large format retail and luxury, urban multifamily are the most vulnerable to a higher interest rate. The properties with the highest rent growth outlook such as data centers, cold storage, single family rentals and manufactured housing are most resilient against higher rates.

Finally, we look at an article by T. Rowe Price named: “Fasten Your Seatbelt for More Interest Rate Volatility”. In this article, they discuss their expectation that around half of the flattening retracement has currently taken place in this rising yield period. To limit the downside possibility for fixed income portfolio’s, T. Rowe Price believes that holding a steepening bias to mitigate against higher inflation is the way to fare.

They speculate that even though monetary policy has helped the volatility at the short end at the curve, that might not always be the case. The article is concluded by a citation of Mr. Fitzsimmons: “The goal is to help manage the pace of interest rate rises—not fix a limit on how far yields can go”.

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Editorial Team OpinioPro
By April 9, 2021 14:55

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