Goldman Says Rising U.S. Rates ‘Boiling the Frog’ of Risk Assets

(Bloomberg) -- Rising U.S. interest rates are probably just beginning to roil risk appetite around the world, according to economists at Goldman Sachs Group Inc.

Global investors may be underestimating the headwinds to financial assets posed by U.S. rates, they said. While the real rate on three-month U.S. Treasury bills -- or the nominal rate minus inflation (or inflation expectations) -- remains negative, Goldman forecasts the measure will diverge from other real rates in the developed and developing world over the next year-and-a-half.

Decent economic data from emerging markets helped mask the rise in real rates earlier this year, but that “changed in April, when a deceleration in EM data arguably exposed the risk consequences of this divergence in policy rates,” strategists Charles Himmelberg and James Weldon wrote in a report dated Sept. 16.

“As the rate of return on safe assets rises, the appeal of risky assets falls, and we increasingly worry that rising trend in U.S. real rates vs. global rates is ‘boiling the frog’ on risk appetite,” they added. “An increase in the fragility of risk appetite is already visible in EM, we would argue, but it logically extends to global risk assets more generally.”

Goldman Says Rising U.S. Rates ‘Boiling the Frog’ of Risk Assets

Risk premia on financial assets -- or the extra cushion investors might expect in return for holding onto riskier securities -- has not matched the rise in real rates, they said. To complicate matters, risk premia remain low even as the economic growth continues to age.

“We ourselves probably under-estimated the degree to which EM assets would prove sensitive to growth disappointments,” Himmelberg and Weldon wrote. “Looking ahead, and across risk markets more broadly, the experience in EM markets over the summer provides a timely reminder that global risk appetite is becoming increasingly fragile as real rates in the U.S. press increasingly higher.”

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