Predicting capital interest rates no longer impossible
It is not unusual for asset managers to have no idea about how interest rates will change in the future. After all, for something that is so important for investors' returns, the level of capital market interest rates seems difficult to predict. Guido Baltussen, Professor of Behavioural Finance and Financial Markets at Erasmus School of Economics and Co-Head of the Quant Allocation team and Lead Portfolio Manager Liquid Alternatives and Multi-Asset Strategies at Robeco, came forward with new research together with Martin Martens and Olaf Penninga of Robeco.
Until today, it almost seemed impossible to draw robust conclusions about interest rates on capital markets. The research period of Baltussen and his co-researchers was more than twice as long compared to the commonly researched period of 1980-2010. In addition, not only American government bonds were studied, but also those of Australia, Canada, Japan, Germany and the United Kingdom. The Robeco team tested a number of market signals on which some investment strategies were based on by using the difference between the yield curve, trends, historical yields of equities and commodities. This resulted in a high predictive value for economic growth and inflation on which statements can be made about interest rates.
The finding that interest rates are predictable has serious consequences for investors. Government bonds can now be used as a safe investment while at the same time the risks of rising interest rates can be anticipated on. But does it make sense to predict interest rates if central banks are in control? Yes, says Olaf Penninga. According to him, central banks only reinforce the market reaction you would expect. In addition, the invasive monetary policy of the last decade is not unique. After the Second World War, the American Federal Reserve deliberately kept interest rates low because huge debts had to be paid off. Once the Federal Reserve had achieved that, interest rates rose sharply in the 1970s and 1980s. With today's knowledge, this too could have been anticipated on.