Understanding Interest Rates Impact

Treasury yields are never just one number—they’re three stories at once. Using August 2025 as example, the 10-year Treasury at 4.23% breaks down into: A • 2.38% expected inflation • 0.97% expected real short rate (R*) • 0.88% bond risk premium That’s the real anatomy. Two-thirds of the yield is about inflation credibility. The rest is growth equilibrium and investor sentiment toward long bonds. History matters. From the 1980s to 2020, all three components fell—driving the great bond bull market. Post-2021, it flipped. Inflation expectations stayed anchored, but real rates and premia moved back into positive territory. That’s why bonds finally pay a real yield again, but their diversification role is weaker. Here’s the friction. Investors who still think of Treasuries as “return-free risk” are behind the curve. With ex-ante real yields near 2% and premia close to 1%, bonds contribute to returns again. But if inflation expectations de-anchor, the hit is double—yields climb, correlations flip positive, and the hedge role disappears. Global data shows the same pattern: higher real yields and premia driving the shift everywhere from Germany to Canada, with Japan as a partial outlier. Diversification isn’t dead—it’s just not as simple as “own bonds and you’re safe.” Portfolio takeaway: • Treasuries are investable again—don’t ignore them. • But they’re not a perfect hedge—pair them with other diversifiers like gold, trend, or alts. • Think global, not just U.S.—the repricing is worldwide. Would you treat bonds as a return engine or a hedge in this cycle? If inflation expectations break higher, how does your allocation shift? Do you diversify bond exposure globally—or concentrate in the U.S.? What’s your alternative hedge if Treasuries fail? For more see our Nomura CIO Corner: https://lnkd.in/e4TCax_g #Treasuries #BondMarkets #Yields #Inflation #Diversification #Nomura #CIO #Macro #Markets

Are European leveraged borrowers rated ‘CCC’ most at risk from higher-for-longer interest rates? Under a scenario of flat interest rates in 2024-2025, Fitch Ratings estimates the median ‘CCC’ rated borrowers' interest cover would fall to 0.9x in 2024, from an already tight 1.3x in its Base Case forecasts. > The Base-Case forecasts incorporate three rate cuts totalling 75bp by both the ECB and the Bank of England (BoE) in 2024, and a further 75bp worth of cuts by the ECB and 100bp by the BoE in 2025. However, recent economic news in Europe has caused some investors to push back their expectations of rate cuts. > For issuers rated at ‘B-’, the median coverage ratio would remain 1.7x in 2024 and 2.0x in 2025. > At these levels there is still room for most businesses to navigate short-term working-capital movements and make needed investments. > As interest cover ratios approach 1.0x, companies face tougher choices regarding the use of discretionary cash flows after debt service, and below 1.0x - the ability to simply pay interest on debt obligations may be called into question. > This further reduces the likelihood of market-based refinancing solutions for these entities, increasing the risk of distressed debt exchanges or payment defaults. > The high leverage taken on by some issuers during the period of low interest rates is unworkable when borrowing costs are 8% or above. > Such companies have come under pressure in the last 2 years to cut leverage to obtain market access when they refinance debt at higher rates. > Interest rate pressure has been more immediate for leveraged-loan borrowers exposed to floating rates. Going forward: > Both floating-rate loan and fixed-rate bond borrowers will have to contend with increased base rates and margins on refinancing. > Gradual improvements in coverage ratios are driven by better operating performance and deleveraging, which is expected across the ‘B’ category. > A hurdle for ‘CCC’ issuers is their persistently high borrowing spreads on interest rates – which makes achieving a workable balance sheet structure even more difficult. > In contrast, for issuers rated in the ‘BB’ and ‘B’ categories, spreads are among the lowest since the global financial crisis. > Strong market supply and demand dynamics, and expectations that interest rates have at least peaked have addressed refinancing pressures for many 'BB' and 'B' rated issuers, and helped them make inroads into refinancing their 2024 and 2025 debt maturities. > Progress has been greater for loan refinancing than for high-yield bonds, with only 40% of loan maturities for each year still outstanding vs. May'23. > For high-yield bonds, 55% of 2024 maturities and 86% of 2025 maturities are still outstanding vs. May'23. Slower Interest-rate cuts a risk to Europe’s ‘CCC’ corporates while ‘B’ rated borrowers remain resilient. Krishank Parekh | LinkedIn | LinkedIn Guide to Creating #leveragedfinance #refinancing #FitchRatings

Same loan amount, same tenure, same credit score, but why are you paying higher interest than your friend? The RBI reduced the repo rate by 100 basis points in 2025, from 6.5% to 5.5%. Yet millions of home loan borrowers haven't seen their EMIs drop! Here's what's happening: In India, home loans follow different rate systems. → MCLR (Marginal Cost of Funds based Lending Rate) If your loan is on MCLR, your bank decides when to reduce your rate. They're not obligated to pass on the repo cut immediately or fully. → EBLR (External Benchmark Lending Rate) If your loan is on EBLR, your rate is directly linked to the repo. It resets automatically every 3 months. When the RBI cuts rates, you benefit within 90 days. The RBI mandated EBLR in 2019 for faster rate cuts - but only new loans got it automatically. Today, over 40% of existing home loans in India are still on MCLR or older systems like Base Rate! And, this isn't a small difference. Take a ₹50L loan over 20 years. → If you're on MCLR at 8.5%, your monthly EMI is ~₹43,391. → If you're on EBLR at 7.5% (post rate cut), your EMI drops to ₹40,280. That's ₹3,111 saved every month. Over 20 years, that's ₹7.46L in total savings! It would cost you anywhere between ₹25K - ₹30K to switch from MCLR to EBLR as a one-time fee. But the math works heavily in your favor. A small one-time cost could save you lakhs in interest. Send this to someone who needs this!

Despite some short-term relief from month-end rebalancing, we believe that government bond yields face upward pressure over the medium term from a supply/demand perspective. There are two duration shifts that present a headwind for government bonds over the medium term. The first duration shift has been taking place in demand and has to do with the retail impulse into bonds. The YTD pace in bond funds is tracking pace of around $450bn-$500bn, a sharp decline from the $1.36tr seen in 2024. The picture looks even more problematic for bond demand if one takes into account the duration impulse. Not only have bond fund inflows slowed sharply this year relative to 2024 but these inflows have shifted away from longer duration government or corporate bond funds towards short duration funds. In other words, there has been an even bigger decline in bond fund demand in duration terms. The second duration shift has been taking place in supply. While the duration impulse of corporate bond issuance has been flattening out as corporates reduced sharply the maturity of their issuance, the duration impulse of government bond issuance continues to rise widening its gap with corporate bond issuance. This is shown in the chart below which depicts the notional amounts of USD corporate bonds in 10y-equivalent terms along with the equivalent metric for the Treasury excluding Fed holdings. In other words, much of the duration supply has been stemming from government bonds rather than corporate bonds.

Today marks a decisive turning point for India’s macro-economic direction! The RBI’s Monetary Policy Committee has cut the repo rate by 25 bps to 5.25%, upgraded FY26 growth to 7.3%, and brought inflation guidance down to 2%. What this means and why the shift matters: 1. Relief for borrowers & businesses A lower repo rate typically eases borrowing costs. Expect improved affordability for consumers and enterprises, which can lift consumption and support capex cycles. 2. A rare “Goldilocks moment” With inflation contained and growth estimates rising, we’re seeing a compelling intersection of price stability and demand-side stimulus — a combination that markets don’t get often. 3. Sectoral tailwinds Real estate, infrastructure and discretionary categories often feel the weight of high interest rates. With easier financing conditions, these sectors may see revived investments, improved hiring, and stronger demand. 4. A disciplined policy stance Despite the cut, RBI’s tone remains measured. The stance is neutral, inflation is modest, and the central bank retains room for future data-driven adjustments. From a macro lens, this isn’t merely a rate cut it’s a signal that India is entering a phase where stability and sustained growth can coexist without inflationary overshoot. What I’m tracking next: Transmission of rate cuts to retail lending, movement in fixed capital formation in Q3, consumption patterns in urban + semi-urban pockets, and MSME credit flow. Is this the start of a new growth cycle? I’m inclined to think yes but the next two quarters will tell us more.

Real yields continue to climb as nominal interest rates increase while core PCE inflation decreases. This dual pressure has caused real yields to rise over 300 basis points in the past 12 months. Real yields are far more important than nominal yields in judging whether interest rates are restrictive or not. To illustrate this, consider the fact that a 4% nominal interest rate in a 7% core inflation world would encourage further borrowing rather than restrict it. As core inflation continues its downward trajectory, real rates in the United States will likely get even higher - and hence more restrictive. There is a scenario in which the Federal Reserve may have to begin cutting interest rates - not to be accommodative - but simply to avoid becoming more restrictive in real terms than they already are.

𝗦𝗮𝗻 𝗗𝗶𝗲𝗴𝗼 𝗠𝘂𝗹𝘁𝗶𝗳𝗮𝗺𝗶𝗹𝘆 𝗖𝗮𝗽𝗶𝘁𝗮𝗹 𝗠𝗮𝗿𝗸𝗲𝘁𝘀 𝗨𝗽𝗱𝗮𝘁𝗲 It has been about 60 days since my last update. Since then, treasuries have been on a wild ride. The 5-year peaked around 4.60% in mid-January and is 𝘀𝗶𝘁𝘁𝗶𝗻𝗴 𝗻𝗲𝗮𝗿 𝗾𝘂𝗮𝗿𝘁𝗲𝗿𝗹𝘆 𝗹𝗼𝘄𝘀 𝗮𝗿𝗼𝘂𝗻𝗱 𝟰.𝟬𝟯% 𝘁𝗼𝗱𝗮𝘆. What does this mean for you? 𝗕𝗲𝘁𝘁𝗲𝗿 𝗳𝗶𝗻𝗮𝗻𝗰𝗶𝗻𝗴 𝘁𝗲𝗿𝗺𝘀! Spreads have been tightening, but generally 2.00% over the 5-year is a good rule-of-thumb in terms of predicting where the best bank financing rates are today for lower middle market multifamily loans. Today, based on CoStar-provided market cap rates, this translates to 𝗿𝗼𝘂𝗴𝗵𝗹𝘆 𝟱𝟰% 𝗟𝗧𝗩 𝗳𝗼𝗿 𝗽𝗲𝗿𝗺 𝗳𝗶𝗻𝗮𝗻𝗰𝗶𝗻𝗴 𝗼𝗻 𝗺𝘂𝗹𝘁𝗶𝗳𝗮𝗺𝗶𝗹𝘆 𝗽𝗿𝗼𝗽𝗲𝗿𝘁𝗶𝗲𝘀 𝗶𝗻 𝗦𝗮𝗻 𝗗𝗶𝗲𝗴𝗼. Right now, rates are about as good as they have been since prior to the election. Now may be a time to lock in long-term financing. In my view, rates are only likely to see significant downward movement if we creep toward recession. In that case, credit will become less plentiful than it is today and property performance may become a stickier underwriting point.

Smart $$$ Thinks Interest Rates Are Going Higher Real investors still exist in this "MIRAGE MARKET" of hope, dreams, smoke, meme stocks, crypto criminals, and AI fluff. Billionaire Hedge Fund manager Bill Ackman Says He’s Short 30-Year Treasuries as Supply Ramps Up In his own words... I have been surprised how low US long-term rates have remained in light of structural changes that are likely to lead to higher levels of long-term inflation including de-globalization, higher defense costs, the energy transition, growing entitlements, and the greater bargaining power of workers. As a result, I would be very surprised if we don’t find ourselves in a world with persistent ~3% inflation. From a supply/demand perspective, long-term Treasurys (T) also look overbought. With $32 trillion of debt and large deficits as far as the eye can see and higher refi rates, an increasing supply of T is assured. When you couple new issuance with QT, it is hard to imagine how the market absorbs such a large increase in supply without materially higher rates. I have also been puzzled as to why the US Treasury hasn’t been financing our government in the longer part of the curve in light of materially lower long-term rates. This does not look like prudent term management in my opinion. Then consider China’s (and other countries’) desire to decouple financially from the US, YCC ending in Japan increasing the relative appeal of Yen bonds vs. T for the largest foreign owner of T, and growing concerns about US governance, fiscal responsibility, and political divisiveness recently referenced in Fitch’s downgrade. So if long-term inflation is 3% instead of 2% and history holds, then we could see the 30-year T yield = 3% + 0.5% (the real rate) + 2% (term premium) or 5.5%, and it can happen soon. There are many times in history where the bond market reprices the long end of the curve in a matter of weeks, and this seems like one of those times. That’s why we are short in size the 30-year T — first as a hedge on the impact of higher LT rates on stocks, and second because we believe it is a high probability standalone bet. There are few macro investments that still offer reasonably probable asymmetric payoffs and this is one of them. The best hedges are the ones you would invest in anyway even if you didn’t need the hedge. This fits that bill, and also I think we need the hedge. #interestrates #riskmanagement #debt #inflation #hedgefunds

Although the federal funds rate, set by the Federal Open Market Committee, is the interest rate at which banks borrow and lend to one another overnight and not the rate that consumers pay, the Fed's actions still influence all sorts of consumer products. Many shorter-term rates are closely pegged to the prime rate, which is typically 3 percentage points higher than the federal funds rate. With a rate cut, the prime rate comes down and the interest rate that short-term debt, notably credit cards, should follow within a billing cycle or two. On the other hand, longer-term rates are also influenced by other economic factors. Both 15- and 30-year mortgage rates, for example, are more closely tied to Treasury yields and those continue to climb amid worries about persistent inflation. Here’s a breakdown of all of the ways the Fed influences credit card rates, mortgages, auto loans, student debt and savings accounts.

Lending rates are moving lower — and pressure on bank NIMs is rising. After the RBI’s rate cut, banks led by SBI have trimmed MCLR by 5 bps. The problem? Deposit rates can’t fall at the same pace. With strong competition from mutual funds and other investment avenues, banks have limited room to reduce deposit costs. The result is a delay in margin recovery. A few key points investors should note: • Lending rate cuts are outpacing deposit repricing • Over 85% of loans are linked to external benchmarks or MCLR, leading to immediate repricing • Fresh deposit rates are already down ~100 bps, leaving little buffer • NIM recovery now looks pushed to Q1 of the next fiscal The only near-term cushion for banks is credit growth in higher-yielding segments like personal and SME loans. But structurally, margins remain under pressure unless deposit costs soften meaningfully — or loan growth surprises on the upside. Lower rates help credit demand. But for banks, profitability is about timing and spreads — not just growth. This phase will reward investors who differentiate between balance sheet strength, liability franchise, and loan mix, rather than treating the banking sector as a single trade. --- #BankingSector #InterestRates #NIMs #IndianBanks #MonetaryPolicy #CreditGrowth #EquityMarkets #FinancialServices