Higher Rates, Healthy Returns

The report forecasts a shift towards a higher growth, higher interest rate environment. This has significant implications for fixed income, where higher cycle-neutral cash rates are expected to support returns, even with the challenge of higher starting valuations. "Higher growth means higher cycle-neutral cash rates, which in turn support fixed income returns." While higher rates increase the cost of capital, the report suggests that this will be offset by stronger economic momentum and increased investment. "Against that backdrop, higher interest rates, which investors have feared for much of the last few years, will be accepted as a positive symptom of stronger, healthier economic momentum." This implies a more optimistic outlook for fixed income than might be expected in a rising rate environment.