By Matthew Hornbach, Global Head of Macro Strategy at Morgan Stanley
"This time is different" might be the four most dangerous and regretted words in macroeconomics and markets. The phrase sometimes lures investors into thinking that market prices reflect something about the future that most don’t fully appreciate yet. We think the current level of real yields represents a difference from the past, but not in the same way many investors see it. The perspective we share below supports our highly bullish view on government bonds.
Many investors think "this time is different" because yields – real yields in particular – have continued to rise despite the approaching end of central bank tightening cycles. The common view holds that markets increasingly price higher equilibrium real interest rates than those of the pre-pandemic decade. This rise stems from higher fiscal deficits and productivity growth rates – two topics at the top of investors' minds today.