Interest rate outlook: Global growth could push US yields higher

Invesco Fixed Income shares its views of rates around the world

Waldner_Rob_sm_150dpi_RGBAt Invesco Fixed Income, we believe strong global growth should ultimately pressure US interest rates upward as global monetary policy tightens. In the short term, however, the US Federal Reserve (Fed) has indicated that it does not intend to tighten interest rates quickly. Moves from other central banks, such as the European Central Bank (ECB), will likely drive price action in longer-dated US Treasuries, in our view. As global growth continues to improve, other global central banks’ actions may catalyze a move higher in US Treasury yields.

Below is an overview of the Invesco Fixed Income team’s outlook for interest rates in other key world economies:

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Why we are not afraid of the Fed

Global growth is picking up, and the Fed seems unlikely to disrupt the momentum

Waldner_Rob_sm_150dpi_RGBThe Federal Reserve (Fed) raised interest rates in March and is likely to raise them again twice this year, yet the financial markets have taken this news in stride. Why is this? Simply put, the Fed is behaving dovishly, considering the positive growth pattern we are seeing.

We are in the midst of a global growth pickup that began in the second half of last year. The three largest economic blocs — the US, Europe and China — are showing solid growth.1

  • In the US, a pickup in expectations and “animal spirits” due to the US election in November has boosted growth to above-trend levels.
  • In Europe, monetary stimulus has supported domestic growth, and the eurozone economy is now also growing above trend after lackluster performance in recent years.
  • The Chinese economy stabilized at the end of last year, and it too is showing upside growth momentum.

For the first time since

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Fixed income: Assessing the landscape for policy changes and asset class fundamentals

2017 Investment Outlook series

Waldner_Rob_sm_150dpi_RGBMacro

Invesco Fixed Income’s 2017 macro outlook is likely to be significantly influenced by the policy direction of newly elected US President Donald Trump and his administration. We believe there are a few key policy elements that will likely be implemented early in the Trump administration. First, fiscal easing: Proposed tax cuts and possible infrastructure spending would potentially boost growth across the board in the US. Second, Trump has promised deregulation of the US economy. In particular, he has indicated a desire to reform the Affordable Care Act (also known as Obamacare), reduce regulation on the energy industry and amend the Dodd-Frank Act. These changes are also likely to boost US growth in the near term, in our view. Third, Trump won using an anti-trade message. We would expect some impediments to free trade to be implemented in the near term. Such measures may have a medium-term negative impact on global growth.

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Macro factor framework helps assess new market conditions

Invesco Fixed Income shares its asset class views based on expected changes to three key factors

Waldner_Rob_sm_150dpi_RGBInvesco Fixed Income utilizes a framework based on the idea that changes in growth, inflation and financial conditions drive much of market beta performance, and that understanding these “macro factors” can help us understand market conditions and price action. We believe this macro factor framework is particularly useful today, as we believe these three factors are undergoing changes, and hence market behavior may be different than it has been in the recent past.

Furthermore, changes in these three factors will likely have different impacts on markets. We believe understanding the changes and impact of each factor and how they relate to each other will promote understanding of market moves.

Growth and inflation

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What will drive markets after Trump’s victory?

The US election results bring short-term uncertainty, but policy will be key in the medium term

Waldner_Rob_sm_150dpi_RGBIn a surprising outcome, US voters elected Donald Trump as the next president of the United States. This result was viewed as unlikely by the market. In the short term, the market reaction may be driven by increased uncertainty. However, over the medium term, Invesco Fixed Income expects the economic impact of Trump’s policies to drive markets.

Although much of the attention of the campaign has been on personalities and temperament, there has been some basic policy framework laid out by the Trump campaign. There is much uncertainty about what will actually be implemented by President-elect Trump, but we believe there are a few key policy elements that will likely be implemented first:

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