Bank of America has issued a caution about the trajectory of global interest rates, signalling potential risks for Australia's superannuation sector. The warning comes as central banks, including the US Federal Reserve, continue to raise borrowing costs to combat inflation.
Mark Cabana, head of interest rates strategy at Bank of America, said US bond yields have risen to multi-decade highs but are not yet causing steep falls in asset prices. "We expect that rates will continue to rise and that the curve will continue to flatten in the US, but also likely globally, simply because the level of interest rates today is not restrictive," he said.
The Fed recently raised its benchmark rate by a quarter of a percentage point to a range between 3.75 and 4 per cent. Goldman Sachs has pushed its forecast for the next hike to December, which would take the fed funds target to 4 to 4.25 per cent.
Cabana said rates approaching that range are nearing the financial danger zone, with greater concern if expectations push into the high 4s and mid 5 per cents. "That might be more consistent with some signs that we start to see a tightening of financial conditions and slowing in macroeconomic growth," he said.
In Australia, the housing market is already cooling and the share market has fallen from its August highs. The Bank of America, valued at roughly $US275 billion, is dependent on well-functioning financial markets. Factors including low productivity, excess demand, the boom in artificial intelligence and the Iran war are all pushing up the cost of borrowing.
The warning underscores the delicate balance central banks face in trying to curb inflation without triggering a broader economic downturn.