Rates outlook 2023

Mohammed Shaheen

Along the credit curve, bond market returns for 2022 have been atrocious. A greater initial running yield and subsequent drops in market rates will improve returns in 2023. Bonds will be a wise investment, especially those that are higher on the credit scale. Be prepared for a decrease in liquidity and increased availability of collateral as other major topics.

Moreover, the federal funds rate is expected to range between 3.9% and 4.9% in 2023, according to Federal Reserve Board members and Federal Reserve Bank presidents. This prediction provides us with a lot of information about potential savings interest rates for the upcoming year.


We compared the current energy situation to the 1970s and 1980s. The Volcker years produced high real rates to combat inflation, which resulted in overall dollar strength. The dot com bubble and fall of 1999–2000 have been compared to the collapse in tech stocks. The dollar was very popular during that time. Additionally, while we sort through the 2019–20 pandemic’s aftermath, the severe strain on the property market serves as a reminder of the big financial crisis of 2007–2008. Numerous similarities, yet none are flawless. These are used in our 2023 narrative, but with a contemporary twist. History doesn’t repeat itself, as we all know, but it frequently rhymes.


Another area of uncertainty is inflation since there are still upside risks (repercussions of previous price hikes, wage dynamics) and disinflation may not be as severe as initially thought. If this were the case, markets and central banks would expect higher policy rate endpoints. This would negatively impact demand and employment as well as financial markets, consumer and corporate confidence, and buying power and margins. Another area of weakness is the housing markets, which might lengthen and deepen the crisis. A significant issue for central banks is to accurately gauge monetary tightening (neither too much, so as not to harm growth too much, nor too little, to curb inflation as quickly as possible). The chance of a mistake is not insignificant if they complete this task in our main scenario.


Last but not least, the rise in gas prices in the euro area is a significant risk factor since the restocking of supplies for the next winter may cause a further price increase.

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