• Constant volatility will be a hallmark of the new market regime, BlackRock strategists say.
  • High interest rates will deepen the US debt problem, which has already increased market volatility.
  • Interest payments on U.S. debt could soon exceed Medicare payments, strategists wrote.

The new market system will be characterized by continued volatility, BlackRock strategists wrote in a note, as higher interest rates exacerbate America’s massive debt problems for longer.

“We believe volatility is a constant in the new regime,” the world’s largest asset manager said in a note on Monday, pointing to a rise in interest rates over the past year. Central bankers have aggressively raised interest rates to control inflation, and the federal funds rate is now at its highest level since 2001.

Interest rates are likely to remain elevated despite some investors’ expectations of rate cuts on the horizon, the note warns. That’s partly because the Fed’s rapid interest rate increases last year suppressed U.S. economic growth, meaning higher interest rates are now required to keep inflation under control.

“Markets appear to be missing the bigger picture and we see greater volatility ahead, swinging between hopes for a soft landing and fears of higher interest rates and a recession,” strategists warn.

Higher rates also spell trouble for the U.S. debt picture, especially as the government’s total debt balance approaches $34 trillion.

This rapid pace of spending has worried economists for years, but commentators warn that the debt burden could soon reach a crisis point as higher interest rates have dramatically raised borrowing costs. Annualized interest spending on the U.S. debt balance reached $1 trillion in the last quarter, according to a Bloomberg analysis.

And if interest rates remain near 5%, the U.S. could soon spend more on annual debt service than on financing Medicare in just a few years, BlackRock said.

Concerns about the US debt situation have already increased market volatility in recent weeks. The Cboe Volatility Index breached the closely watched mark of 20 in October, partly because of debt concerns that sent U.S. bond yields higher. The 10-year U.S. Treasury yield also briefly topped 5% last month, a 16-year high.

BlackRock has previously warned of difficult conditions for markets as the era of easy money and abundant liquidity comes to an end. Instead, strategists see inflation heading higher and warned last month that markets have yet to assess some of the damage to the macro picture.



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