Synthesis
The recent rise in long-term interest rates may no longer be a simple adjustment. The conflict in Iran, oil prices hovering around $90, and persistent US inflation have acted as triggers. But behind these immediate factors lies a deeper transformation: the world that allowed for persistently low rates is disappearing.
The first change: inflation could become structurally higher and more volatile. Since the 1980s, globalization, offshoring, and international value chains had allowed developed economies to import disinflation. Geopolitical fragmentation is gradually reversing this dynamic: reshoring, tensions over raw materials and strategic components, rising energy costs, and a shrinking workforce due to aging are creating more pressure on costs and wages.
The second change: US monetary policy is becoming less predictable. Warsh wants to reduce the Fed’s communication and challenge forward guidance. The goal is to make markets more dependent on their own analysis of the economy. But less information also means a wider range of expectations and potentially more volatility in interest rates.
Third disruption: the explosion in public financing needs. US debt has just surpassed $40 trillion, and the IMF expects global public debt to exceed 100% of GDP by 2029. Aging populations, healthcare, defense, AI, decarbonization, and industrial policy are all requiring substantial spending. The supply of public debt will therefore remain structurally abundant.
Added to this is growing competition between public and private capital needs. AI, electricity infrastructure, and the climate transition require massive investments. If European savings increasingly finance its own technological catch-up, and if China recycles fewer of its surpluses to the United States, US debt could face less automatic external demand. The result would be further pressure on real interest rates and bond yields.
Finally, the change is political and institutional. The world of globalization was based on the idea of a convergence of rules and institutions. This convergence is fading in favor of national strategies, competing industrial policies, and power dynamics. This heterogeneity increases uncertainty and demands a higher premium for long-term capital investment.
This may be the real regime change: long-term interest rates are now rising because the global system is becoming less predictable, less cooperative, and more capital-intensive. Globalization had fostered convergence and lower interest rates; fragmentation could produce the exact opposite.
