In a recent discussion on Bloomberg Television's Wall Street Week, Kenneth Rogoff, former Chief Economist of the International Monetary Fund (IMF), highlighted an extended period of high bond yields, with the US Treasury's 10-year yield reaching its highest point since 2007. This surge has been driven by strong employment data and persistent inflation.
Rogoff identified increased defense spending and significant investments in green energy transition as key factors contributing to the rise in borrowing costs. He also pointed out the impact of China's slowing economy on globalization as another contributing factor. Despite potential challenges from high-interest rates, Rogoff maintains that the US economy can manage a 5% rate and is currently adjusting to these changes.
The former IMF chief economist further noted that the Federal Reserve's fight against persistent inflation is far from over, and real rates are likely to stay high due to deficit worries and anticipated sustained high-interest rates by the Fed.
Earlier this year, in June, Rogoff had predicted that these treasury yields would yield returns of 4% throughout the 2020s. However, a subsequent spike of 90 basis points has pushed returns to 4.58%. Given these developments, many top investors now expect these yields to exceed 5% soon.
Rogoff suggested that the current trend of high rates might reverse if they start to negatively impact the real economy and investment. However, he cautioned that high bond yields, especially ten-year US Treasury yields at their highest since 2007, are expected to remain for some time amid a historic crash in longer-duration bond prices.
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