What might rising rates mean for high yield bonds?

Three reasons why high yield has performed well in past rising rate environments

Scott RobertsTime to read: 4 min

US interest rates have defied market expectations in recent years, staying historically low despite solid economic growth. But in the last year, and especially the last few months, rates have started to climb. The 2-year Treasury currently yields 2.58% compared to 1.92% at the start of the year and 1.31% a year ago.1 The 10-year Treasury yield has breached 3.0% in recent days, compared to 2.46% at the start of the year and 2.34% a year ago.1 What do these rate moves mean for high yield investors?

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Get ready for the 2-month T-bill

Treasury appears ready to introduce this new maturity later this year

Time to read: 3 min

After three years of discussion, the US Treasury appears ready to introduce a new 2-month Treasury bill (T-bill) into its auction schedule. Invesco Fixed Income believes a 2-month T-bill auction would be a positive addition to the Treasury’s current lineup and would be unlikely to create market disruption.

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Sector performance and economic cycles: When do sectors have the potential to shine?

Where we stand in the economic cycle can have a measurable effect on sector performance

Nick KalivasTime to read: 4 min

There are many determinants of stock performance. Corporate earnings, fiscal policy and interest rates can all influence the equity markets. But equity returns are also dependent on where we stand in the economic cycle.

Some sectors, such as industrials and financials, tend to display strong performance early in the economic cycle when economic growth is accelerating. Other sectors, like utilities and consumer staples, tend to be strongest very late in the economic cycle when economic growth is weakest.

How do we know this?

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What do higher oil prices mean for the stock market?

Weekly Market Compass: There are several reasons why high oil prices may pressure stocks

Time to read: 4 min

In the past few weeks, the price of a barrel of oil has risen to its highest level in the last several years, and I believe it is poised to move higher. Lately, I’ve been asked quite a bit about what this means for the stock market. While high oil prices may have an effect on certain sectors and industries, I believe the far greater impact would be indirect — and could happen in several different ways.

Why have oil prices risen?

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EM opportunity knocks — what to make of the recent market volatility

Emerging market debt has tumbled, but the macro story remains compelling

Time to read: 4 min

Following two consecutive years of double-digit returns in 2016 and 2017, emerging market (EM) debt1 has had a rocky ride so far in 2018. However, in the view of Invesco Fixed Income, the proximate cause for the recent volatility has been a tightening in US financial conditions, not a deterioration in overall EM fundamentals. Therefore, we believe this EM correction has created the largest divergence between fundamentals and valuations seen in many years, and offers a compelling opportunity to add exposure to EM in local currency debt.

The US dollar has risen sharply

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Are you prepared for rising interest rates?

Defined maturity bond fund ETFs may provide a compelling option for a rising interest rate environment

Time to read: 3 min

Interest rates continue their upward trend. In March, the US Federal Reserve (Fed) hiked the federal funds rate by 25 basis points to a target range of 1.5% to 1.75%, citing strength in the US labor market, a low unemployment rate and moderate economic growth.1 This was the sixth such rate increase since December 2015, and isn’t likely to be the last. With inflation nearing the Fed’s annual 2% target, members of the Federal Open Market Committee (FOMC) — the Fed’s policy-making arm — anticipate at least two more 0.25% increases in the federal funds rate by year-end.2

What’s in store for the yield curve?

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Currency outlook: US dollar may be pressured as investors seek more promising growth opportunities elsewhere

Invesco Fixed Income shares its views on currencies around the world

Time to read: 3 min

US dollar:

Underweight. The US is in the later stage of its economic cycle relative to the rest of the world, in our view. We expect the Federal Reserve to grow cautious while other central banks continue tightening. The dollar should be pressured weaker as investors look for better growth and return opportunities elsewhere. However, the fundamental picture has been muddied recently, with growth data disappointing relative to expectations — resulting in a mixed performance for the US dollar. We believe this is a short-term correction in market expectations for both US and global growth. We are watching the data closely to be sure that constructive fundamentals are still intact and this is not the start of a downward trend.

Euro:

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Interest rate outlook: Falling US inflation may become a Fed concern by late 2018

Invesco Fixed Income shares its views on rates around the world

Rob WaldnerTime to read: 3 min

US:

Neutral. Inflation trends are showing no signs of a significant pickup, and economic data over the coming months should support a Federal Reserve (Fed) rate hike in June (currently expected by the market). We think slowing inflation will become a concern for the Fed later in the year, especially as the housing component slows. Over the longer term, we believe risk/reward dynamics favor US Treasuries, especially if geopolitical uncertainty begins to increase. However, with the market correction pushing yields higher in April, we remain neutral on US rates in the near term.

Europe:

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Market disruption shows no signs of slowing down

Weekly Market Compass: Examining the Brexit transition, Italy’s coalition and the Iran nuclear accord

Time to read: 4 min

For more than a year, I have been talking about the growing impact that disruption is having on global markets. The events of last week illustrated that this theme isn’t slowing down.

Monetary policy disruption

About a decade ago, many of our major central banks became ultra-accommodative — with most immersed in experimental monetary policy — in response to the global financial crisis. Normalizing monetary policy from these extreme levels carries the potential for disruption, so central banks today are attempting to delicately unwind their policies, which is an experiment in and of itself.

A case in point is

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Regulatory changes put spotlight on bond pricing, disclosure

New rules require more transparency around corporate, agency and municipal bond markups

Time to read: 3 min

Effective May 14, 2018, new regulations will be adopted aimed at increasing the transparency of bond pricing. The new rules require dealers of corporate, municipal and agency bonds to clearly disclose bond markups and provide retail investors with relevant price comparisons.

Although this initiative was spearheaded by the Municipal Securities Regulatory Board (MSRB) to cover municipal bonds, the Financial Industry Regulatory Authority (FINRA) has been working in tandem with the MSRB on language that covers corporate and agency bonds as well. Ultimately, the two regulatory agencies came up with

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