Moody's: Markets entering new macro regime of high borrowing costs

A Moody's report indicates a major shift in global markets to a new era of high borrowing costs, AI investment, and geopolitical risk, moving away from the post-2008 environment of ultra-low interest rates and subdued inflation.

Global financial markets are entering a prolonged phase of structurally higher borrowing costs, sustained investment in artificial intelligence (AI) and infrastructure, and elevated geopolitical risks, with investors increasingly positioning capital around these long-term trends, according to a Moody's Ratings cross-sector report.

The report, "A new macro regime is driving differentiated repricing across financial assets", said market pricing across bonds, equities, credit and commodities indicates that the post-2008 era of ultra-low interest rates and subdued inflation has given way to a fundamentally different macroeconomic environment.

"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," the report said.

Higher Interest Rates Likely to Persist

Moody's said government bond markets suggest higher interest rates are likely to persist. The report noted that 10-year sovereign bond yields across advanced economies have climbed back to levels seen before the global financial crisis, reflecting expectations of stronger investment demand, larger fiscal deficits and structurally higher inflation.

"Long-term government bond yields have risen structurally across advanced economies, marking a durable repricing of duration risk," the report said. It added that stronger investment demand, firmer inflation and higher government borrowing are leading investors to expect policy rates to remain higher over the long run.

Capital Flowing to Policy-Supported Sectors

The report said capital is expected to continue flowing towards sectors supported by long-term policy priorities such as AI, semiconductors, defence, electrification and critical minerals, while sectors facing AI-driven disruption or structural cost pressures are likely to lag.

"The sectors attracting disproportionate capital and policy support - AI and adjacent technologies, defence, critical minerals and energy-transition plays - share these characteristics. Those lagging adoption or facing structural cost pressure are repricing in the opposite direction," Moody's said.

According to the report, industrial metals are increasingly being supported by structural investment in digital infrastructure and the energy transition rather than the traditional business cycle, while geopolitical tensions continue to keep a premium embedded in energy prices.

Future Risks and Market Assumptions

Looking ahead, Moody's cautioned that current market valuations assume AI investment will deliver productivity gains, funding conditions will remain supportive and geopolitical tensions will not worsen significantly.

"Current pricing hinges on whether expectations for policy-supported, capital-intensive growth translate into real earnings and productivity gains. Any slippage in outcomes, tightening in funding, stress in opaque credit channels or an escalation in geopolitical fragmentation could expose vulnerabilities and trigger a broad reassessment of valuations and credit risk," the report said. (ANI)

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