Globe and Mail: Interest rates could keep rising for decades

The Globe and Mail is out with a piece arguing that the recent spike in borrowing costs is not a blip. While many of the factors driving the recent increase are temporary, higher interest rates are more likely than not to be the norm for decades, widening generational inequality.

What the piece actually says

The recent rise is not unique to Canada, as global interest rates have spiked in recent weeks, with U.S. 30-year mortgage rates now exceeding 7 per cent and the yield on a 10-year U.S. government bond recently breaking the 5.2-per-cent barrier, a level not seen since 2002.

Much of this is owing to energy price inflation after the closing of the Strait of Hormuz. Resolving the Hormuz conflict will reduce inflation and interest rates in the short run, but long-run factors will push rates higher over time.

The structural case for higher-for-longer

Day-to-day rate volatility is a fact of life, but interest rates tend to trend downward or upward over extended periods because of slow-moving demographic and economic trends.

The relative supply of funds available to borrow and the demand for them are key drivers of rate changes. If funds to borrow are scarce, lenders can name their price, and interest rates will be high; conversely, a savings glut looking for places to invest will drive rates down. Inflation is also a key driver, as it shapes central banks’ rate decisions.

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Why traders should care

A persistently higher rate regime reprices everything. Duration-heavy assets, long-dated growth equities, and highly levered balance sheets get hit hardest, while cash and short-duration credit keep their new premium.

Housing is the obvious pressure point, but the second-order effect shows up in bank securities portfolios, commercial real estate refinancings, and the discount rate applied to mega-cap tech multiples. For more macro coverage, see other market news here.

Options market and stocks to watch

If the higher-for-longer thesis keeps traction, watch these names:

• TLT: the long-duration Treasury ETF is the cleanest expression of rate direction; watch for flow around any move back toward the 5% area on the 10-year.
• XLRE: real estate sector ETF, sensitive to cap-rate expansion if yields grind higher.
• KRE: regional banks carry unrealized losses on securities books that widen when long yields rise.
• XHB: homebuilders live and die by the 30-year mortgage rate, which is already above 7%.
• QQQ: long-duration tech multiples compress in a higher discount-rate world; watch for shifts in GEX and flow around rate catalysts.

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