Interest rates: the era of a world of plentiful and free money seems to be over

The road is straight, but the slope is steep. The Western world is going through one of the most violent stages of rising interest rates, under the pressure of inflation that has now reached levels not seen in decades. Faced with rising prices, central banks have no choice but to strengthen their stance, then move from words to deeds. The financial markets are adjusting. “We are in the process of putting a price on money, which changes a lot of things”, sums up the economist Christian Parisot.

The U.S. Fed is expected on Wednesday with a 0.5 point increase in the Fed’s funding rate, its chairman Jerome Powell widely announced. “If it does less, it will lose credibility, if it does more, it will mess up,” Christian Parisot continued. The market is particularly watching the announcements as well as Jerome Powell’s tone, which will make it possible to project – that – towards the next meeting in June.

“The level of interest rates is still very low due to inflation which is at 7-8% on both sides of the Atlantic”

Vice. The US central bank may begin to reduce its balance sheet, marking a high point in the normalization of its monetary policy. At Mirabaud, John Plassard raised the rate to 95 billion dollars per month, twice as fast as in 2017, when it tried to reduce the money supply for the first time. Investors are forecasting short -term interest rates close to 2.5% at the end of the year, against a range of 0.25% to 0.5% at present. The value of the ten -year federal debt has gone from less than 1.2% to nearly 3% in a matter of months. Another world. “In the United States, jobs are bubbling, final demand is very strong, as well as investment and inflation. The Fed is in a very fast rate tightening process, it has no choice but to be aggressive, ”said Samy Chaar, chief economist at Lombard Odier.

If Washington takes the lead in the dance, the European Central Bank (ECB) will soon switch gear. After a few diligent years, its money injections will end at the beginning of the summer. An increase in its interest rates is expected in the process, which will be the first since. July 2011. In the markets, the cost of borrowing rises. In Germany, the yield on ten -year public debt briefly reached 1% on Tuesday, the highest since 2015. Last summer, these same bonds were traded at -0.6%. Here in France where this rate flirted with the bar of 1.5% (against -0.22% in August), its highest level in almost eight years.

More broadly, only 18% of government bonds in the euro zone now show a negative yield, according to data from the Tradeweb platform, compared to about 23% last month. In 2016, when Tradeweb started counting it, this proportion was 43%, Reuters reports. Will the good life of the borrowers come to an end? They have taken the bad habit of paying less than the amount borrowed, they need to update their calculations. And most debtors are preparing to face a more “normal” financial environment. This is the case of France. “Inflection is violent because central banks have artificially lowered the price of money. But the level of interest rates is still very low due to inflation which is at 7-8% on both sides of the Atlantic ”, tempers Christian Parisot.

“In the United States, risk-free investment, represented by public debt, pays back. It can be a game-changer in asset allocation.”

“Hardness”. However, the fiscal law for 2022 is based on a ten -year rate of 0.75%. We are double. The impact on public accounts will certainly be modest in the short term, as the State has had time to run a lot of debt at very low levels in recent years. But the (excessive) debt burden will only increase over time, if the trend continues.

In the short term, market operators will in any case be very destabilized by the new “austerity” of central banks. Stock market indices are yo-yoing, volatility is back. And at just $ 1.05, the euro, which pays less than the greenback, is on a dangerous slippery slope. He lost 14% in a year. This is bad news for the bill for our hydrocarbon imports, in particular. Between inflation and recession, the world seems to be on a dangerous ridge line.

Fund managers warned about other possible sources of vulnerability associated with the end of free money. Should we, for example, fear the end of Tina (No alternative), which has benefited greatly on the Stock Exchange? Between equities and public debt at negative rates, the choice has been quickly made in recent years, bringing the former to the top. However, “we are really in the process of changing times. In the United States, risk-free investment, represented by public debt, pays off again. This can be a game-changer for asset allocation, especially if the company’s results have failed, ”one expert notes. Higher interest rates also threaten the health of the real estate market, the balance of a certain number of leveraged operations, and the daily life of businesses. In other words, they disrupted the environment born of years of free money.

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