Perspective on Interest Rates

Perspective on Interest Rates

Citi global strategists Robert Buckland expects continued drops in inflation-adjusted bond yields, and that’s not good news for bank stocks (my emphasis),

“Unprecedented global QE [quantitative easing] is keeping a lid on nominal bond yields despite rising inflation expectations. This favours US and EM equities, traditional Cyclicals, IT and Growth strategies. It remains a drag on Defensives and Value. The Japan experience suggests capped nominal yields can be a heavy burden for Financials … QE has two key jobs: stabilize markets and finance deficits. The first has been done, but the second will take years. Hence rates are likely to stay low even if economies recover and inflation picks up. We expect break-evens to keep rising. Overweight traditional Cyclicals, especially commodity stocks. Overweight EM. Underweight Defensives.”

Profit margins on lending for banks depend on the difference between longer terms rates (the ones they charge borrowers) and short-term rates where they borrow the money to lend. Flat yield curves mean low profits on loans.

Scott Barlow,

The Globe and Mail