BofA’s Warning of a ‘5% World’ Sinks in With Yields Pushing Higher

All around the world, bond traders are finally coming to the realization that the rock-bottom yields of recent history might be gone for good.

The surprisingly resilient US economy, ballooning debt and deficits, and escalating concerns that the Federal Reserve will hold interest rates high are driving yields on the longest-dated Treasuries back to the highest levels in over a decade.

That’s prompted a rethink of what “normal” in the Treasury market will look like. At Bank of America Corp., strategists are warning investors to brace for the return of the “5% world” that prevailed before the global financial crisis ushered in a long era of near-zero US rates. And BlackRock Inc. and Pacific Investment Management Co. say inflation could remain stubbornly above the Fed’s target, leaving room for long-term yields to push even higher.

“There is a remarkable repricing higher in longer-term rates,” said Jean Boivin, a former Bank of Canada official who now heads the BlackRock Investment Institute.

“The market is coming more to the view that there is going to be long-term inflation pressures despite recent progress,” he said. “Macro uncertainty is going to remain the story for the next few years, and that requires greater compensation to own long-dated bonds.”

It’s a sharp break for markets that last year started positioning for a recession that would push the Fed to ease monetary policy, raising hopes for a sharp rebound from a brutal 2022 that sent Treasuries to the deepest losses since at least the early 1970s.

While higher rates will soften the blow by boosting bondholders’ interest payments, they also threaten to weigh on everything from consumer spending and home sales to the prices of high-flying tech stocks. What’s more, they will increase the US government’s financing costs, worsening the deficits that are already forcing it to borrow some $1 trillion this quarter to cover the gap.

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