A gradual interest rate normalization is expected to occur during a prolonged multi-year economic expansion, according to BNY Mellon chief economist, Richard Hoey, as outlined in his report entitled, ‘Interest Rate Normalization.’
Hoey said: "The aftermath of the three-decade-long decline in interest rates is likely to be labeled a long-term secular bond bear market, but we prefer to view it in the context of the cyclical normalization of interest rates that we expect over a half-decade period, a return to a ‘secular neutral’ center-of-gravity for interest rates."
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Overall, Hoey expects a three-phase normalization of bond yields over a half-decade period which include: a sudden rise from artificially depressed bond yields to free-market yields, a prolonged gradual upward drift over the next two years in response to normal cyclical forces; and a late spike in interest rates when Fed policy turns restrictive following seven years of economic expansion.
"From now on, however, if our economic forecast is correct, there should be a slower rise in bond yields as a gradually rising cyclical tide lifts the free-market level of bond yields. The recent rapid rise in bond yields made fundamental sense as the markets discounted the end of an artificial bond scarcity, but it is likely to be followed by a much more gradual upward drift over roughly the next two years as cyclical fundamentals evolve," Hoey added.
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