What higher-for-longer rates mean for investors

The resurgence of the higher-for-longer trend in interest rates reflects a “very different macroeconomic environment” than investors saw in the previous decade, CIBC Asset Management’s chief investment officer says.

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According to Luc de la Durantaye, the trend of higher rates was interrupted earlier this year amid the U.S. regional banking crisis and government debt ceiling concerns. Now, the effects of higher rate expectations are being felt through bond, equity and currency markets.

“The continuous rise of interest rates is the reflection of a very different macroeconomic environment than we had been accustomed to,” he said.

This new environment has been catalyzed by a number of factors, de la Durantaye said, including heightened government spending, central banks’ unwinding of Covid stimulus measures, the need for investments in energy transition and technology, and demographic shifts resulting in reduced savings.

De la Durantaye described an imbalance in bond markets. On one side, he said, there’s a diminishing pool of bond buyers as an aging population saves less. On the other, governments and corporations are issuing bonds at an increased rate, driven by high spending on energy transition and technology.

This growing gap between bond supply and demand is causing interest rates to surge, a trend de la Durantaye said is likely to persist.

“We’re trying to assess where we are in this repricing of bonds,” he said.

“Since the yield curve is still somewhat inverted, you’re not rewarded enough to take on a longer maturity in your portfolio.”

Only in the event of a recession would he start considering longer maturity. For now, he’s taking a defensive position, maintaining neutrality in investment-grade bonds and underweighting high-yield while looking for opportunities selectively in emerging markets.

De la Durantaye is also cautious on equities. He said increased competition from bonds and high stock prices mean it’s important investors select equities that can sustain their earnings.

In terms of currencies, de la Durantaye notes a decoupling between regions such as Asia, where some countries are lowering interest rates, and other economies that continue to raise them. This disparity in interest rate differentials presents opportunities for investors, he said, with currencies like the Mexican peso, Indian rupee, and Brazilian real offering attractive differentials.

In this “higher-for-longer” environment, de la Durantaye said investors should continue to monitor central banks’ actions for potential entry points. As central banks conclude their tightening cycles, investors may find opportunities.

“There’s always fear in this environment where central banks sound more aggressive, and that creates a bit of a passive approach by investors,” he said.

“I think where there are changes in the market, there are opportunities. And we think the coming months will provide attractive investing opportunities.“

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