Risk | Interest Rate Outlook

Real interest rates are rising alongside nominal rates. In the past, this was often a sign of stronger growth, as higher real interest rates were driven by companies borrowing more to invest. Now, however, other factors are also at play, and a further rise in real interest rates could set in motion a negative spiral that could have a significant impact on both short-term and long-term interest rates.

The rise in long-term interest rates over the past period has been driven not only by higher energy prices but also by concerns over public finances and increased demand for capital. In a scenario where the Strait of Hormuz reopens soon (which is by no means certain), we therefore do not expect long-term interest rates to fall to the lows seen just before the Iran War.

Two forces are dominating the bond markets: Geopolitical tensions surrounding the Strait of Hormuz and unabated enthusiasm for AI. Both point toward higher long-term interest rates. However, for short-term interest rates, we expect a scenario quite different from what the markets are currently pricing in.