What is the "right" interest rate anyway?

As the benchmark ten-year Treasury yield surged toward 4.35 per cent, touching levels not seen since 2007, fixed-income markets were forced to confront an uncomfortable conceptual question: what if the natural, non-inflationary real rate of interest—the elusive r-star—has drifted structurally higher? For a decade following the financial crisis, central bankers assumed that secular stagnation had permanently depressed the neutral rate to zero.

The Structural Shift

That paradigm is disintegrating. The massive capital demands of the global energy transition, structural defence spending, supply-chain reshoring, and chronic fiscal deficits suggest that the demand for capital has outpaced the global supply of savings. If the real neutral rate has risen from zero to two per cent, policy rates at 5.5 per cent are only moderately restrictive rather than suffocating.

If the neutral rate of interest has drifted permanently higher, bond investors waiting for a return to the low-yield environment of the 2010s are anchoring their portfolios to a world that no longer exists.