U.S. Growth to Boost Forward Real Rates, Societe Generale Says

The stage is set for a rebound in depressed U.S. forward rates adjusted for inflation as economic growth gains momentum while price pressures remain contained, according to Societe Generale SA.

Five-year interest-rate swaps traded five years in the future, when projected inflation is accounted for, have slid almost 120 basis points in 2014 amid tepid first-half growth that drove nominal yields lower. So-called real five-year five-year forward rates, on course for the sixth decline in eight years, should move higher as consensus growth forecasts for 2015 appear “easily achievable,” the French bank’s strategists said in a Dec. 29 note.

“Low inflation will protect the ‘secular stagnation’ theme” marked by “excess supply versus chronic lack of demand,” a team of Societe Generale analysts including Vincent Chaigneau, global head of fixed-income and foreign-exchange strategy, wrote in the note. “But stabilizing or even improving growth should stop the fall in long-term U.S. dollar real rates.”

U.S. gross domestic product expanded at a 5 percent annual rate in the third quarter, the most since the same period in 2003. That followed at 4.6 percent advance in the April through June period and comes as the U.S. unemployment rate is at a more-than-six-year low of 5.8 percent. The economy grew at an average pace of 1.3 percent in the first half of the year after expanding at a 2.2 percent rate in all of 2013.

Monetary Easing

Low real rates have made wealth creation difficult for savers, as interest returns on investments from bank deposits to government debt declined. The Federal Reserve’s unprecedented monetary easing, including bringing its policy rate to near zero, buoyed share prices while savers struggled. Benchmark U.S. equity indexes are ending the year near record levels, with the Standard & Poor’s 500 index poised for a third straight annual rise.

The median forecast of 85 economists surveyed by Bloomberg calls for U.S. growth of 3 percent next year. Higher growth and the first Fed rate increase since 2006 will buoy nominal Treasury yields, with the 10-year set to rise to 3.01 percent from 2.22 percent, according to the median estimate in a separate Bloomberg survey.

The Fed cut its benchmark rate for overnight loans between banks to a range of zero to 0.25 percent in December 2008. While growth has gained speed the central bank’s preferred gauge of inflation, a measure tied to personal consumption expenditures, was 1.2 percent in November, below its target of 2 percent.

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