Bonds will be fine; stocks look shaky
All this drama has given markets a holiday of sorts: it offered a break from obsessing about how high interest rates will need to rise to quash inflation. Since the Federal Reserve started hoisting borrowing costs in March last year, little has mattered more to investors. But after’s fall, the question was not how much the Fed was prepared to do to fight inflation; it was how much it might need to do to stabilise the financial system.
The new mood music can be heard outside America as well. In Britain former rate-setters have warned that the Bank of England’s benchmark rate may rise to 6% from its current 4.5%. Yields on government bonds have climbed to within touching distance of levels last September, which at the time were only reached amid fire sales and a market meltdown.
The return of rising rates feels more ominous for investors. True, part of the story is that the economy has held up better than expected at the start of the year, and certainly better than feared once banks began to buckle. Yet the bigger part of the story is that inflation has proved unexpectedly stubborn. As of April “core” American prices, which exclude food and energy, were 5.5% higher than a year ago. Although recession has been avoided or delayed, few are predicting stellar growth.
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