Will US Treasury yields hurt private equity boom?September 14, 2020
Your favorable reaction (FT editorial “The Fed’s welcome inflation evolution”, Aug. 29) to the Federal Reserve’s apparent easing of its long-time strategy on inflation and employment (FT – “Fed to tolerate higher inflation in policy shift”, Aug. 29) seemed at odds with the Treasury market’s reaction (FT – Fixed Income “ Yield curve steepens sharply after Fed pledge to let inflation run above target”, Aug; 29).
The steeper rise of long-dated Treasury debt yields suggests that investors may, in fact, be worried by the potential inflationary impact of the Fed keeping short-term interest rates near zero for years, even though the Fed’s balance sheet is at a record high and the federal debt-to-GDP ratio now exceeds 100%. Markets undoubtedly recognize that inflation has sometimes been the politically expedient way to deal with a growing debt service burden.
Rising Treasury yields might also dent private equity’s popularity at the expense of the ordinary investors (FT Opinion – “Private markets are a club and the ordinary investor is not invited”, Aug. 29). It will be interesting to see if “safe” Treasuries with rising nominal and real yields once again attract investors concerned about inflation. If so, private equity might start to look less appealing to institutional investors.