Live Markets-Barclays' three reasons to expect higher US rates

Barclays points to several key factors that will determine the future trajectory of interest rates:

1. First, the macro backdrop: above-target inflation, a resilient economy and easy financial conditions suggest risks remain tilted toward higher rates.
2. Factors that have been suppressing term premium, such as the Fed's long-duration balance sheet, could start to unwind.

Term premium is the extra yield investors demand for holding a longer-term bond, to compensate for uncertainty over time. Quantitative easing measures after the COVID-19 pandemic helped suppress term premia, while Fed Chair Kevin Warsh has advocated a smaller Fed balance sheet, implying reduced bond holdings.

1. Given that Japan's Government Pension Investment Fund (GPIF) holds roughly 25% of its portfolio in foreign bonds, equivalent to about $470 billion, any shift in its asset allocation could put upward pressure on term premia in overseas bond markets.

Japan's finance minister said the government aims to steer the country's vast state pension funds to "substantially" increase investments in domestic assets.

The debate over the path of U.S. interest rates is more alive than ever after two rounds of weak inflation data prompted traders to scale back their bets on a rate hike this year.

However, some analysts say the longer-term outlook continues to point to a hawkish policy stance.

“There is room for estimates of the neutral rate and term premium to be reassessed higher,” Barclays says in a research note.

The neutral rate is the interest rate that neither boosts nor slows the economy and is often seen as the long-term target for monetary policy.