Interest rate outlook: Fed likely to extend its pause beyond market expectations

Invesco Fixed Income shares its views on rates around the world

Rob WaldnerTime to read: 2 min

US: Underweight.

Global interest rates are close to their recent lows, despite our view that growth risks are fading. In addition, it appears likely that the Federal Reserve will extend its pause longer than the market anticipates, and there is a chance of a pivot to a new policy framework (as discussed in our blog: Five things we think could go right for global markets in 2019). Both factors argue for higher bond yields and steeper yield curves going forward.

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Five things we think could go right for global markets in 2019

From the Fed, to Brexit, to China, we see positive signs that could support risk assets

Rob WaldnerTime to read: 5 min

At Invesco Fixed Income, we often talk about the risks that are likely to upset global markets. In this blog, we highlight the five things we think could go right and support markets in 2019. First, the US Federal Reserve (Fed) has told markets it is willing to be “patient,” and there is the possibility this patience could last a while. Second, US-China trade tensions have calmed somewhat, as the two countries appear motivated to reach agreement on key issues. Third, China is stimulating its economy, which we believe will support growth. Fourth, Brexit is softening, with the tail risk of a hard or no-deal Brexit diminishing in recent weeks. Finally, we see no signs of an impending US recession, despite fears that disrupted markets at the end of 2018. Each of these five possibilities would likely be supportive of risk assets, in our view.

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Interest rate outlook: US Treasuries likely to be stuck between better-than-expected growth and a dovish Fed

Invesco Fixed Income shares its views on rates around the world

Rob WaldnerTime to read: 3 min

US: Neutral.

In the near term, we expect Treasury yields to be stuck between better-than-expected growth and a dovish Federal Reserve. The Fed stated it will remain patient when considering future hikes and has noted concerns about a lack of persistent inflation. Over the longer term, we expect growth and inflation data to support a hike in June. While we continue to believe peak US growth is behind us, we expect it to remain above-potential through the first half of 2019. Inflation will likely remain benign in 2019, although labor costs may continue to accelerate. This could allow the Fed to continue its gradual path of policy normalization after a March pause.

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Interest rate outlook: US interest rates will likely remain range-bound

Invesco Fixed Income shares its views on rates around the world

Rob WaldnerTime to read: 3 min

US: Neutral.

US interest rates should continue to be range-bound amid moderating growth and expected increases in US Treasury supply. We believe the market will begin to price in a more moderate growth outlook in 2019 as the effects of tax stimulus wane and tighter Federal Reserve (Fed) policy begins to bite. On the other hand, Treasury supply is expected to remain elevated and Fed asset purchases are expected to decline year-over-year. We expect inflation to remain benign — softening into year-end on weaker rental and services inflation. Any re-escalation of the trade conflict would likely create Treasury market volatility.

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Interest rate outlook: US markets may price in slower growth in the second half of 2019

Invesco Fixed Income shares its views on rates around the world

Rob WaldnerTime to read: 4 min

US: Neutral.

We expect US interest rates to remain range-bound due to moderating gross domestic product (GDP) growth and looming US Treasury supply. Growth over the next few quarters will likely be driven by consumption and capital expenditures supported by US tax reform. We believe the market will begin to price in a less positive growth picture in 2019, as the effects of tax stimulus wear off and the impact of tighter Federal Reserve (Fed) policy begins to take hold. We could see below-trend growth in the second half of 2019. Additionally, core US inflation has begun to soften, and in the coming months we expect softer rental and service inflation to drive core consumer price inflation below 2% (excluding tariff-related price increases). In addition, US Treasury supply has continued to increase in 2018 while Fed purchases have declined. This combination has led to increased volatility in the Treasury market.

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