Asoka Woehrmann and Randy Brown are co-chief investment officers at Deutsche Asset & Wealth Management
Economic theory suggests that long-term savers expect to participate adequately in real growth and be compensated for inflation.
From May – when the Federal Reserve announced its intention to reduce its quantitative easing programme – to the start of September, yields on 10-year US government bonds increased from 1.66 per cent to almost 3 per cent.They are currently at roughly 2.6 per cent. This shows the market continues to anticipate a tightening of monetary policy. Early indicators suggest that the Fed will resume tapering at the end of 2013 or beginning of 2014.Readings above 50 of the PMI composite index, which measures the sentiment of purchasing managers in industry, indicate expansion: the index is currently at a healthy 55.7 points. Accordingly, US government bond yields decreased only modestly after the recent Fed meeting.How high could US interest rates go? Economic theory suggests that long-term savers expect to participate adequately in real growth and be compensated for inflation. If, as expected, real growth reaches 3 per cent in the coming year and the core inflation rate (excluding food and energy) is just less than 2 per cent, the yield on 10-year US bonds should rise in the next year from 2.6 per cent before levelling off at roughly 3.7 per cent....MORE