According to the latest Markets Live Pulse (MLIV Pulse) survey, after the COVID-19 epidemic, the neutral interest rate has at least doubled, which gives investors reason to be nervous about buying bonds or stocks.
A neutral interest rate level refers to interest rates that neither stimulate nor slow down the US economy.
Among 528 respondents, about 85% believed that the so-called real neutral interest rate (excluding the impact of inflation) had risen to about 100 basis points or more, while it was about 50 basis points before the outbreak of COVID-19.
Federal Reserve Chairman Powell stated in March this year that "to be honest, we don't know" where the neutral interest rate is. But if the resilient US economy has pushed it above historical consensus levels, then the Federal Reserve has reason to maintain a tight monetary policy for a longer period of time.
As investors digest the prospect of long-term interest rate hikes, both stock and bond prices have recently suffered heavy losses. Last week, the yield of 10-year US treasury bond bonds briefly exceeded 5% for the first time since 2007, which especially triggered concerns about the valuation of technology stocks. Both the S&P 500 index and the Nasdaq 100 index, which is dominated by technology stocks, have entered adjustments.
The pressure on US debt is unlikely to ease
For 10-year US treasury bond, respondents do not expect the pressure on this asset category to ease. According to the median forecast of respondents, the yield of 10-year US treasury bond bonds may be 5% by the end of the year.
Federal Reserve officials expect the long-term federal funds rate to be 2.5%, while assuming an inflation rate of 2%, implicitly predicting an actual neutral rate of 50 basis points.
In addition to economic intensity, the possible reasons for the rise in neutral interest rates include: the baby boomers are retiring and spending their savings, which reduces the supply of savings; China's interest in US treasury bond bonds is weakening; The expanding government deficit has intensified competition for investment capital.
More importantly, the uncertainty about the future after the COVID-19 epidemic prompted consumers to consume before saving, a phenomenon known as "high time preference". Essentially, this means that consumers will seek higher interest rates to invest, thereby pushing up neutral interest rates.
Most respondents were pessimistic about the impact of the rise in US treasury bond bond yields. Respondents expect that if the yield remains above 5% for a quarter or longer, it will lead to a hard landing of the economy, which is caused by the Federal Reserve's action to curb inflation and trigger an economic recession. About 47% said that the economy would calmly cope with the rise in treasury bond yields.
At 2am Beijing time on November 2nd, the Federal Reserve will announce its latest interest rate resolution, and officials are expected to stabilize interest rates at their highest level in over 20 years. At the press conference after the meeting, Federal Reserve Chairman Powell may mention the topic of rising treasury bond bond yields. Investors will focus on the Federal Reserve's view of the recent surge in treasury bond bond yields and what this means for the prospect of a soft landing of the economy.
Against the backdrop of the rise in US treasury bond bond yields and the Federal Reserve's decision to maintain interest rates at a higher level for a longer period of time, nearly 60% of the respondents said they expected the US dollar to strengthen in a month.
Technology stocks overvalued
For US stocks, over 60% of respondents stated that both the S&P 500 and Nasdaq 100 indices are overvalued, while about 15% of respondents estimate that only technology stocks are overvalued.
45% of respondents said that the Nasdaq 100 Index will decline by up to 10% this quarter. 20% of respondents stated that the decline in the index will be even greater.
Earlier this year, the enthusiasm surrounding artificial intelligence prompted investors to overlook rising interest rates, driving the Nasdaq 100 index up about 35% in the first three quarters of this year. Now, the index is likely to decline for the third consecutive month, a situation that has never occurred in more than a year. According to a calculation, as of the close of last Friday, the index is still overvalued by 10%.