Are global interest rates destined to skyrocket in 2022? As inflation surges across many Western economies, the ECB, the Federal Reserve and other central banks seem ready to “tighten” monetary policy. So recently rising long rates may seem set to spike. Many observers, pundits, economists and investors fret about major economic and market fallout if they do. If that held true, China would suffer from tanking export demand. But don’t sweat over it. As temporary price pressures wane, long rates will shock everyone and end 2022 about where they began — whether central banks “tighten” or not. And even if yields rise, the impact won’t match the fear.
While headlines shriek of long-lasting inflation, still-benign long rates show that the forces now stoking prices are temporary. If they weren’t, long rates — which reflect inflation expectations — would surely have soared long ago. Yes, outside China’s sideways drift, rates have bounced higher in most major countries. But consider the levels. In the U.S., 10-year Treasury rates jumped from a paltry 1.51% at yearend to a still-paltry 1.75%. German rates? They rose from -0.18% to -0.03%, which many fret is “almost positive.” French yields rose from a miniscule 0.20% to 0.30%. Japanese yields more than doubled! But you need a microscope to see the rise from 0.07% to 0.15%.
