The Joseph Group

Higher for Longer – Bond Yields Aren’t Going Back to the Past

July 11, 2023

To Inform:

I had a dream the other night. I owned a DeLorean with a fully functioning flux capacitor and felt a strong urge to go back to 2013 and buy some real estate. In my dream, my wife asked me “what about interest rates?” I told her, “Honey, where we’re going there aren’t any interest rates.” Okay, so maybe not as fun as Robert Zemeckis’ 1985 classic, but this dream (alright, it wasn’t a dream, it’s a literary device) didn’t require harnessing any lightning bolts. Time traveling back to 2013, we find mortgage rates at historic lows (eclipsed only by rates seen in the post-pandemic period of 2020/21). The mantra back then when it came to interest rates was “lower for longer.” Today, in 2023, the story with interest rates may very well be “higher for longer.” Read on for the why behind this, and the good and bad of such a shift.

The “why” behind higher interest rates began in 2022 as inflation became a problem after years of being well-contained. The Federal Reserve embarked on an aggressive rate-hiking cycle early in 2022 and short, medium, and long-term interest rates began moving upwards. Today, despite inflation coming down well off last year’s highs, rates remain near multi-year highs. The 2-year Treasury again crested 5%, having done so in March just before the banking system stress became evident. For an idea of just how rare 5% yields are on 2-year Treasuries, consider the fact that since 2001, we’ve had less than 70 trading days where the 2-year Treasury note closed with a rate above 5%!

Source: Bloomberg


The good news for investors and savers is these rates are not likely headed back to 2010s levels (sub 1%) any time soon. The economy is simply running too hot and labor markets remain too tight for interest rates to drop significantly. “Okay,” you may be thinking, “shouldn’t rates go down if the economy slows down?” You’re right, in such an event interest rates would likely decline. But, for how long? What happens in the recovery?

A post-recession environment is not likely to look like the ones seen in the early 2000s or after the financial crisis of 2008-09. One factor that supports the idea of higher for longer interest rates is what is happening in the labor force. Labor force participation in the 55+ category (Boomers and Xers) is plumbing long-term lows. As Baby Boomers and Xers continue to retire in the coming years, the labor force is going to be challenged to come up with workers. The chart below illustrates this point. The percent of the US population that was of working age in 2010 was over 67%. This number has steadily fallen since and is projected to continue doing so throughout the 2020s. This, I think, creates a floor level of wage growth and inflation ultimately creating a floor on interest rates in the coming years.

Source: Axios


The good in a higher for longer environment is savers and investors can generate decent returns while taking lower amounts of risk. We’ve written and talked about how now is a much better time to own bonds (read Bond Math has Changed here).

The “bad” is in the impact higher rates have on borrowers, both households and “marginal” companies, or businesses that have shaky business prospects and rely on debt to continue operations. If the cost of borrowing has shifted higher and is likely to settle there, a lot of businesses will struggle, and some projects (think commercial real estate) simply won’t get off the ground.

For us and the clients we have the privilege to work with, we’re considering the investment implications of this profound shift. Over the last year we’ve trimmed exposure in many client portfolios to places like real estate and infrastructure and have added (and continue to look for opportunities) to add to bonds and high-quality stocks in companies with strong balance sheets and solid cash flows. The playbook for higher for longer is out there, it just may be a little dusty.





Written by Alex Durbin, Portfolio Manager