Global interest rates are approaching levels that could begin causing meaningful financial damage, according to Bank of America, creating potential risks for Australia’s A$4.5 trillion superannuation industry.
Bank of America head of interest rate strategy Mark Cabana has warned that borrowing costs remain insufficiently restrictive to materially slow the US economy, meaning rates could have further to rise.
The US Federal Reserve’s benchmark interest rate currently sits between 3.75% and 4.00%, while government bond yields have already surged to levels not seen for decades.
Cabana believes financial conditions would become considerably more concerning if rate expectations moved into the high-4% to mid-5% range.
Australian retirement savings exposed
The warning matters for Australians because superannuation funds have substantial investments in global equities, including major US technology companies.
If interest rates rise sufficiently to trigger a major repricing of stocks, bonds or private assets, those movements would flow through to retirement portfolios.
Australian financial markets are already beginning to feel the effects of higher global borrowing costs.
The Australian 10-year government bond yield has climbed above 5%, while property prices have fallen and the ASX remains below its August peak.
Bank of America’s warning does not mean a financial downturn is inevitable.
Strong economic growth and the artificial intelligence investment boom continue to support corporate earnings and markets.
However, the higher yields climb without economic activity weakening, the greater the risk central banks will need to tighten further, potentially pushing financial markets beyond the point where investors can comfortably absorb higher borrowing costs.
