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Structural rise in real interest rates: Treasury premium erosion and asset allocation implications | State Street

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Rising equilibrium real rates, driven by declining Treasury convenience yields, are emerging as a dominant force in asset pricing.

The post pandemic rise in real interest rates has unsettled a long standing macro regime defined by secular disinflation, global savings glut, and strong demand for safe and liquid assets. What initially appeared to be a cyclical normalization, has persisted even as inflation receded, raising the possibility that equilibrium real rates have shifted structurally higher. Recent discussions by monetary researchers1 and central bankers2 have increasingly pointed to the possibility of higher equilibrium real interest rates. Real rates are at two-decade highs and are expected to rise further as…

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