Moody’s Warns of End to Low Borrowing Costs as Global Economy Enters New Macro Regime
The era of ultra-low interest rates that followed the 2008 global financial crisis may be coming to an end. Investors are bracing for a prolonged period of higher borrowing costs, sustained investment in artificial intelligence (AI) and infrastructure, and increased geopolitical risks. A recent report by Moody’s Ratings indicates that the macroeconomic environment is shifting, leading to differentiated repricing across various financial assets.
According to Moody’s, current market pricing reflects a broader change in the global economy rather than a disconnect from real economic conditions. The report states, “A common refrain is that financial markets are disconnected from the real economy and thus underpricing macro risk. We disagree and see market pricing… as a coherent response to a macro regime shift – away from the post-2008 world of low growth, subdued inflation and suppressed real rates, toward one of greater uncertainty, structurally higher real rates, and policy shaped by geoeconomic and security concerns.”
Bond markets point to higher borrowing costs
Moody’s highlights that government bond markets suggest higher interest rates are likely to persist. The agency notes that 10-year sovereign bond yields in advanced economies have returned to levels seen prior to the global financial crisis. This trend reflects expectations of stronger investment demand, larger fiscal deficits, and structurally higher inflation. The report states, “Long-term government bond yields have risen structurally across advanced economies, marking a durable repricing of duration risk.” It adds that these factors are leading investors to anticipate elevated policy rates over the long term.
AI, defence and critical minerals to stay in focus
The report emphasizes that capital will continue to flow into sectors aligned with long-term policy priorities, such as AI, semiconductors, defence, electrification, and critical minerals. Conversely, sectors facing AI-driven disruption or structural cost pressures are likely to lag. Moody’s notes, “The sectors attracting disproportionate capital and policy support – AI and adjacent technologies, defence, critical minerals and energy-transition plays – share these characteristics.” Additionally, industrial metals are increasingly supported by structural investments in digital infrastructure and energy transition, rather than the traditional business cycle. Geopolitical tensions are also contributing to elevated energy prices.
What could change the outlook?
Moody’s warns that current market valuations depend on expectations that AI investment will yield productivity gains, funding conditions will remain favorable, and geopolitical tensions will not escalate significantly. The report states, “Current pricing hinges on whether expectations for policy-supported, capital-intensive growth translate into real earnings and productivity gains.” Any deterioration in these outcomes, tightening funding conditions, stress in opaque credit channels, or an increase in geopolitical fragmentation could expose vulnerabilities and prompt a reassessment of valuations and credit risk.
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