Recent research on long-run trends in interest rates suggests that creditors hoping for healthy real yields in future are likely to be disappointed
Save time by listening to our audio articles as you multitaskSuch abrupt surges have raised fears of an imminent recession, and caused asset prices to plunge. Nonetheless, increases in long-term yields are likely to be temporary.
This gap reflects investors’ expectation that inflation is likely to subside fairly soon. But recent research on long-run trends in interest rates suggests that creditors hoping for healthy real yields in future are still likely to be disappointed. Last month Mr Schmelzing, along with Kenneth Rogoff of Harvard and Barbara Rossi of Pompeu Fabra University, released a working paper that tried to identify key points in history when the path of interest rates changed. Surprisingly,-weighted real rates followed nearly a straight-line long-term trajectory during the entire period, falling by an average of 0.016 percentage points per year.
The authors speculate that the trend may be more likely to flatten out as rates approach negative territory than to continue for ever. However, they “do not see evidence of that yet”. A simple linear extrapolation implies that on average, real rates will sink below zero for good in 2066.
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