JP Morgan CEO, Jamie Dimon, warned that the current bull market in yields could run for another 2 or 3 years and could see 10 year yields go as high as 5% in the U.S. Speaking at a summer gala in Aspen, Dimon said, “I think rates should be 4 percent today. You better be prepared to deal with rates 5 percent or higher – it’s a higher probability than most people think.”
This is something that has been on the cards for a long time and there is a low probability of most investors and businesses “being prepared” for higher rates and the effect that would have on financing and debt repayments. Dimon’s speech came just days after the Bank of England raised the key interest rate in the UK for only the second time in ten years as the economy has struggled to strengthen since the financial crisis. The UK interest rate is still below 1% at 0.75% but the move will still affect 3.5 million variable rate mortgages.
The US Federal Reserve raised interest rates again in June, with another two hikes expected for the rest of the year as they work to combat a rise in inflation, driven by the strength of the US economy. This is the highest inflation rate in the US for six years. Inflation in the UK has cooled to 2.4% from 3% at the start of the year, so the UK benchmark rate should rise more slowly than the US. Higher rates in the US and a stronger economy could cause a rally in US Dollar which is a headache for emerging markets who issued trillions in US Dollar-demoninated debts in the last years.
The prospect of higher interest rates is something that CFOs should be prepared for in the next few years.