[OPE] Prospects for interest rates in the longer term

Martin Wolf ("Why rising rates are good news", FT december 14, 2010)
comments:

"Are long-term interest rates likely to rise still further? Definitely.
After all, if long-term real interest rates and inflation expectations were
both around 2 per cent, one would expect yields on conventional bonds to be
at least 4 per cent - and more if one also allowed for inflation risk. But,
in its thought-provoking new report on the cost of capital, the McKinsey
Global Institute argues we will not go back to where we were before the
crisis. It argues, instead, that we may be at the beginning of a secular
rise in global real interest rates, as the investment programmes of the
emerging world make up a rising share of the world's demand for capital. If
so, yields on government bonds in highly rated high-income countries might
end up above 5 per cent in normal conditions."
http://www.ft.com/cms/s/0/b129a644-07b5-11e0-a568-00144feabdc0.html#axzz18FmAIbSn

The McKinsey report is here:
http://www.mckinsmgi/publicationsey.com//farewell_cheap_capital/pdfs/MGI_Farewell_to_cheap_capital_full_report.pdf

The report has some nice graphs on longterm trends in interest rates and the
investment pattern. Interestingly, exhibit E1 suggests that the value of
gross fixed capital formation for 53 countries together as a proportion of
GDP rose from 2003 to 2008 from 20.8% to nearly 24%, slumping to 21.8% in
2009 (that would be primarily buildings and vehicles). The proportion of
GFCF in GDP never reached the level of 1979 again in the last two decades.

In the short term, interest rates may be low, but in the longer term they
will
edge up, that's the argument.

J.

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Received on Thu Dec 16 02:24:44 2010