The Business Times

HSBC’s major raises prospect of ultra-low US rates returning

Published Tue, Oct 25, 2022 · 06:26 AM

MARKETS are underestimating the odds of ultra-low interest rates making a comeback in the US as the Federal Reserve’s hawkish stance risks crashing the economy, according to HSBC Holdings.

There’s a “quite high” probability that the US central bank will need to cut rates close to zero in the next three to five years, Steven Major, the head of fixed income research at the bank, said in an interview. Trends seen before the Covid-19 pandemic that kept inflation low - such as ageing demographics, excessive debt and wealth inequality - still exist today, he said.

“You’ll get a hard landing and the probability of the market pricing a return to the zero bound cannot be ignored,” Major said. “We’re pricing a very high probability of the Fed going to 5 per cent and staying there forever, which doesn’t seem plausible.”

The Treasury market was upended Friday on speculation the Fed may slow the pace of rate increases as early as year-end, after a Wall Street Journal report noting some officials are concerned about overtightening monetary policy. Swaps’ traders slashed the expected Fed policy rate peak in early 2023 to about 4.9 per cent on Friday from above 5 per cent the day before. Yields were slightly up on Monday.

This is not the first time that Major has said the market is overestimating future rates. His fixed-income team saw its consensus-defying forecasts that ultra-low interest rates are here for the long term largely vindicated over the years, before the upward spike in yields since the pandemic caught them out.

Real yields are attractive at current levels, said Major Friday. He favours bonds in the middle of the curve and long-dated Treasury inflation-protected securities, known as TIPS. The median number of months between the Fed’s last hike and the first cut in the last 70 years is four months, he said. He expects officials to deliver the last increase early next year.

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“It’s reasonable to be looking at next summer for a possible change in direction,” he said. “Some people think you can afford to wait. The danger with waiting is you miss the really good value that bonds are currently offering.” BLOOMBERG

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