An Update from Our CIOs: Entering the Second Stage of Tightening

Bridgewater

Greg Jensen, Bob Prince

Article

1 Pages

Bridgewater examines why the tightening cycle may be entering a second stage, with long term rates now doing more of the work. After 18 months of unusually resilient growth and markets, fading liquidity support could increase pressure on bonds, equities, and economic activity.

Key Takeaways

Bond Yields Reprice: With T bill rates at 5% or higher, Bridgewater estimates bond yields may need to reach 5.5% or higher to provide a risk premium.
Delayed Tightening Impact: Despite 18 months of one of history’s fastest tightening cycles, unemployment, activity, and stock prices showed relatively limited effects as liquidity and strong balance sheets cushioned conditions.
Equity Support Fades: Over Over the past 12 months, falling equity risk premiums more than offset rising discount rates, leaving US equities roughly unchanged since interest rates began rising.
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