Investors are bracing for a prolonged period of high interest rates, triggering a downturn in financial markets. This shift in sentiment was sparked by a series of monetary policy announcements from major central banks, including the U.S. Federal Reserve, the Bank of England, and the European Central Bank. These institutions have signaled that interest rates will remain elevated for an extended period, a message that has been absorbed by bond and foreign exchange markets but has been slower to impact the stock market.

The yield on two-year U.S. Treasuries, a key indicator of near-term monetary policy expectations, has risen from 3.8% in May to 5.1%. Long-term rates have also been on an upward trajectory, with the ten-year U.S. Treasury yield reaching a 16-year high of 4.6%.

Meanwhile, the U.S. dollar has strengthened, buoyed by a robust domestic economy and expectations that U.S. rates will outpace those of other countries. The DXY, a measure of the dollar’s value against six other major currencies, has risen by 7% since July.

Despite these developments, the stock market has been slow to react to the prospect of sustained high interest rates. Investors have remained optimistic about the potential of artificial intelligence and the resilience of the U.S. economy. However, recent disappointing consumer confidence and housing data suggest that this optimism may be misplaced.

If investors are beginning to accept that high interest rates are here to stay, the coming months could bring further market turbulence.

Read more at The Economist.