Here Come Long-Term 5.5% Borrowing Costs, Says BlackRock

Planning on higher for longer interest rates has been making the rounds through some savvy and successful CRE giants of late. CBRE said last week that the yield on the 10-year Treasury would be “higher for longer, but not forever.”

And now, in an interview with the Financial Times, Jean Boivin, head of the BlackRock Investment Institute, basically told everyone to hold onto their hats because he sees long-term borrowing costs in the U.S. staying high for years.

The 10-year’s yield dropped to 4.57% on Friday’s close, but if BlackRock and CBRE are right, that’s going to change over the longer term, and not for the better.

“We think 5.5 per cent long-term 10-year yields in the US is the level that seems consistent with the macro backdrop in the next five years,” Boivin told the Financial Times. “It’s also consistent with the compensation for risks that bond investors should require to invest in long-term bonds.”

The drop of the 10-year, started with two events. One was when the Federal Reserve holding on a rate hike in a move that investors seemed to think meant a long-term decision, which isn’t what the Fed said. The other was the Treasury’s indication of a slower growth pace for additional borrowing to redeem maturing debt.

So, many investors and experts read their tea leaves and decided that the Fed would hold indefinitely and, maybe, start to roll back the previous rate hikes. But market reactions are often wrong because they can be dominated at the most dangerous times by wishful thinking. While the Fed keeps saying that it’s committed to bringing inflation down to 2%, Boivin was skeptical. “We see inflation on a rollercoaster: falling now but then starting to unsettle sometime after next year,” he told the FT. Over the next year or two, he said that U.S. inflation would likely be closer to 3%.

While futures market activity suggest an expectation of rate cuts starting in July 2024, Boivin said that “late 2024, if at all” was more realistic.

One of the main causes is aging populations, which puts pressure on labor markets. Another is geopolitical stress and “fragmentation” making global supply chains more difficult and expensive to maintain, and then rising energy costs.

An additional concern, according to BlackRock, is that when 10-year yields stay around 5%, about 14% of the nation’s budget will go to service on the U.S. debt. That is a heavy weight on running the country.