What a Rate Hike Can Mean for Long-Term Yields | American Funds

  • Forms

Investment Insights

November 2015

What a Rate Hike Can Mean for Long-Term Yields

A portfolio manager discusses why interest rates have remained low in the U.S. and what to expect from yields when rates do rise.



Wesley Phoa


Wesley Phoa: If we think about why the interest rate environment is so low right now, I think we should focus on both the short-term reasons and what’s happening in the longer term. In the short term, rates are low because economies have been weak around the world and central banks have been pushing rates low to try and respond to that, to try and get activity moving again. It’s worked in the United States; it remains to work in other parts of the world.

Now, taking a longer term perspective, rates are low because, I think, looking forward there’s going to be structurally lower growth than there was in the last quarter of a century: structurally less volatile and lower inflation. And both of those things are consistent with lower rates, even when economies in different regions are all back on track.

When the Fed starts to hike rates, short-term rates always rise — by definition — and the yield curve always flattens. That’s what happens. But the question is, can long-maturity yields actually fall in that environment? In the past they’ve usually gone up, just less than short-term rates. Sometimes they don’t. Ten years ago you had what was known as “the conundrum,” when short-term rates went up and long term rates actually fell.

Whether that happens or not depends on the situation in the rest of the world. If you have other economies, particularly China, having to stimulate, having to keep rates low, then that’s bound to spill over to the United States, as it will spill over to other regions in the world. That’s the thing that can keep long-term yields down, even as the Fed is hiking quite decisively.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. 

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice.