June 2021 - Significant disconnect between real rates and the growth outlook - Tactical Fund Manager's Comments

12 July 2021

Hasan Aslan

Investors continue not to be remunerated for holding safe assets such as US Treasuries when adjusted for inflation. Given the strong growth outlook for this year, this configuration sends a rather disturbing message to the market consensus which is largely taking into account the reinforcement of the recovery with the reopening of economies. Clearly, we agree that the very high level of debt is structurally constraining real rates. Some market pundits also argue that central banks have distorted so many measures that real rates do not necessarily reflect the economic growth under way. Let’s have a look at a more relevant and less distorted gauge of real interest rates. The 5y forward expectation of USD 5y real interest rates shown in the chart below suggests that growth is anticipated to be at lower levels in the future. After having briefly resurfaced into positive territory during Q1 2021, it grinded lower, namely due to mixed/disappointing job market reports in the US, inflationary pressures which are mainly contained to segments severely hit by the pandemic (a base effect) and government pandemic relief checks that are coming to an end. On top of that, central banks keep on pursuing very accommodative policies for the time being.

5Y5Y USD Real Interest Rate Expectations

Source: Bloomberg, RAM AI, as of 30.06.2021

In the following chart, 10y real yields are compared to US economic growth every year (forecast for 2021). We are currently seeing the biggest gap between real interest rates and the market outlook for growth.

USD 10Y Real Yield vs GDP Growth

Source: Bloomberg, RAM AI, as of 30.06.2021


The disconnect between the growth outlook for this year and the signals from the fixed income market opens the door for adjustments in one way or the other. Risk assets pricing over the past quarters leaves little margin for errors. Therefore, we are convinced that a risk/reward-oriented approach focused on liquidity and diversification will prove its value in an environment which is subject to adjustments in the coming months.


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