Home Breadcrumb caret Economy Breadcrumb caret Economic Indicators Breadcrumb caret Investments Breadcrumb caret Market Insights Don’t expect high interest rates Interest rates won’t return to prior highs for two reasons. By Sarah Cunningham-Scharf | June 11, 2015 | Last updated on June 11, 2015 2 min read Interest rates won’t return to prior highs for two main reasons. Listen to the full podcast on AdvisorToGo. We’re seeing lower real growth rates across the globe and, on top of that, more liquidity, says Patrick O’Toole, vice-president of global fixed income at CIBC Asset Management and co-manager of the Renaissance Canadian Bond Fund, an underlying fund in the Renaissance Optimal Income Portfolios. First, “we know populations are aging. [That] doesn’t mean we have stagnation, but it does mean we have a slower trend growth in the economy.” Read: Make way for centenarians Currently, he adds, real growth rates are estimated at 2%, when previously they were as high as 3% or 3.5%. The problem is lower growth rates translate to dipping bond yields, which could mean lower central bank rates. Read: Will there be more global volatility? Should you judge a bond by its label? “In the old days, we’d see a 2% real rate,” says O’Toole. “You’d take real growth at whatever it happened to be, and you’d add 2% for inflation—part of the reason you had to pay people a real rate, or a rate over and above inflation, was competition for money.” Now, however, “with excess liquidity in the world, the competition for capital isn’t as strong, [and] governments won’t have to pay as much to get money.” Read: A wild ride, but equities to outperform bonds There are also lower short-term bond yields, says O’Toole. And, “T-bill yields are [likely] only going to be giving return of inflation when the U.S. Federal Reserve starts moving interest rates higher.” Tips for clients Going forward, O’Toole says investors shouldn’t expect a real rate of return on risk-free, 90-day U.S. or Canadian T-bills. Plus, low short-term interest rates may also affect other investments. “Given that short-term rates set the direction for long-term rates, [products such as] bond yields and mortgage rates are going to be lower than we’ve seen in the past.” Read: Short-term bonds are overvalued Over the next couple of years, O’Toole predicts North American central banks will only raise short-term bond rates to 2.5%. “That should mean bond yields are lower in this cycle than they’ve been in past cycles; they’ll be somewhere in the order of 4% or 4.5%.” In terms of the global economy, he finds investors should consider there are also aging populations in Europe and China. Plus, the American economy is doing better and supporting the strong U.S. dollar, and “all of these things combined help cap the upside on bond yields.” Read: Consider active management to earn income Still, O’Toole expects interest rates will eventually rise. But any hikes we see aren’t “going to be dramatic increase[s] like we’ve seen in prior cycles.” Read: Why you should choose corporate bonds Fed officials split over economic slowdown Client should consider bond ETFs, say experts Sarah Cunningham-Scharf Save Stroke 1 Print Group 8 Share LI logo