Harsh reality of ‘higher-for-longer’ rates looms over U.S. stocks

As the Federal Reserve’s hawkish stance boosts Treasury yields and slams stocks, some investors are preparing for more pain ahead.

With policymakers projecting rates will remain around current levels until the end of 2024, some investors say more volatility could be in store. Higher yields on Treasuries - which are sensitive to interest rate expectations and seen as risk free because they are backed by the U.S. government - offer investment competition to stocks while raising the cost of borrowing for corporations and households.

AQR’s analysis showed that trend-following hedge funds tend to outperform when rates are elevated, as they hold large cash positions that benefit from higher rates. “Investors are going to be even more worried that we could enter into a recession as the cost of borrowing is increasing and corporate margins will be squeezed,” he said.

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Analysis-Harsh reality of 'higher-for-longer' rates looms over US stocksAs the Federal Reserve’s hawkish stance boosts Treasury yields and slams stocks, some investors are preparing for more pain ahead. For most of the year, equity investors brushed off a rise in Treasury yields as a by-product of better-than-expected economic growth, despite worries that yields could eventually weigh on stocks if they rose too high. Those concerns may be taking on fresh urgency after the Fed last week forecast it would leave rates elevated for longer than many investors were expecting.
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