Is this the end of the era of inexpensive money?

The global economy is undergoing a significant adjustment in the cost of capital. Interest rates are climbing in Europe, the United Kingdom, and even in the United States. When you factor in the persistent rise in inflation, driven by supply chain disruptions from the pandemic and escalating energy prices due to conflicts in Ukraine and Iran, it becomes clear why bond prices are increasing; lenders are unwilling to offer loans at rates lower than the expected inflation.

For the past twenty years, governments worldwide have depended on, and in some instances exploited, low interest rates to fill economic gaps and provide support through borrowing, especially as the pressures from COVID and the war in Ukraine intensified.

The continuous rise in interest rates is becoming a significant concern both economically and politically, as the costs associated with servicing debt—specifically the interest—are now a much larger part of national budgets. This indicates that we have entered a phase where capital is no longer essentially free, and it may take time for the ‘normal’ levels of long-term rates and costs to become clear.

The challenges we face include inflation, rising populism from both ends of the political spectrum, deficits, and protectionist measures. The world has become a more perilous and debt-laden environment than it has been in a century, and international bond investors are taking notice.

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