On the rise

Long-term interest rates are rising across the globe. In principle, higher yields simply reflect the time value of money and stable inflation expectations. But today, they are telling a different story.

Bond vigilantes are increasingly questioning the ability of governments in France, Japan, the UK, and the US to manage ballooning budget deficits and refinance heavy debt burdens. The result: higher demanded yields, which in turn increase governments’ financial charges at precisely the moment when political instability is spreading across developed economies.

This stands in sharp contrast with equity markets, which continue to set new highs and seem to be pricing in a rosier picture. At ECP, we believe now is the time to remain disciplined: focus on quality companies with undervalued earnings power, strong balance sheets, and the ability to generate solid cash flows in a more volatile environment.