Currency outlook: US dollar may be caught between two opposing trends

Invesco Fixed Income shares its views on currencies around the world

Time to read: 3 min

US dollar: Neutral. We believe the US dollar is caught between two trends. Interest rate hikes and balance sheet reduction by the US Federal Reserve (Fed) have increased US dollar funding costs and tightened financial conditions, spurring the dollar rally. Uncertainty over trade policy has exacerbated the move. On the other hand, global growth has been strong and it appears that US economic activity, while buoyant, has peaked — a convergence that typically causes the US dollar to weaken.

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Interest rate outlook: US GDP of 2.8% expected in 2018

Invesco Fixed Income shares its views on rates around the world

Rob WaldnerTime to read: 3 min

US: Neutral. We expect US rates to stay range-bound, caught between growing trade worries and above-trend US growth. Core inflation continues to be benign, and we expect it to peak in the next two months at around 2.4%. After this, we see softer rental and service costs driving it below 2%. Assuming no large trade-driven shocks, US growth is likely to remain above trend for the rest of the year. It should be supported by increased energy sector capital expenditures, strong job growth and strong consumption. We expect 2018 gross domestic product growth of around 2.8%, 1% above the long-term sustainable trend. The risk of tighter global financial conditions due to trade-related tensions and the possibility of further tariffs in the next few months may cause asset price volatility. Treasury prices may benefit if volatility picks up.

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Limited supply has supported municipal bonds in 2018

Tax reform created a rush of issuance last year

 Time to read: 3 min

Recently, municipal bonds have performed well despite increased market volatility and a rising interest rate environment that saw the 10-year US Treasury yield breach 3% a number of times this year.1 The Bloomberg Barclays Investment Grade Municipal Bond Index has returned 0.49% and the corresponding high yield municipal index has returned 1.07%, quarter-to-date.2 We believe this strong muni performance was due in part to investor risk aversion that has benefitted both municipal bonds and Treasuries as well as a reduction in muni supply following the 2017 tax reform.

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Assessing the expanding universe of triple-B rated corporate debt

Does higher issuance equal higher risk?

Time to read: 3 min

In the midst of all the geopolitical drama of the past year, it was easy to overlook a developing story in triple-B rated bonds — issuance has exploded. According to Morgan Stanley, there is now $2.5 trillion of triple-B rated debt outstanding, nearly double that of five years ago.1 Now, the big question is whether rising leverage is a sign of increasing risk for investors, as companies may become vulnerable to downgrades. At Invesco Unit Trusts, we see this growth (and accompanying volatility) in triple-B bonds as an opportunity for strategies that are designed to identify companies with strong fundamentals and hold their bonds to maturity — like unit investment trusts (UITs).

What is driving the surge in issuance? 

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It’s official: US Treasury to launch a 2-month T-bill

Invesco Fixed Income does not anticipate significant market disruption due to the new T-bill offering

Time to read: 2 min

A new 2-month Treasury bill (T-bill) will launch in October, according to details announced by the Treasury on Aug. 1. The new T-bill will share a schedule with the 1-month T-bill, which is currently auctioned on Tuesday and settled on Thursday of the same week. Then on Dec. 6, both bills will transition to a Thursday auction and settlement the following Tuesday. Invesco Fixed Income believes that this transition period should allow investors to become familiar with the new bill and help minimize the possibility of disruption at the short end of the Treasury bill yield curve.

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What could a trade war mean for US macro fundamentals?

The biggest risk could be a tightening of financial conditions

James OngTime to read: 3 min

The growing prospect of a global trade war presents major consequences for global markets, and the implications are difficult to assess. Because the past 30 years have consisted of generally expanding trade liberalization and global trade (shown in Figure 1), we are left with limited information on how financial markets would likely respond. Below, I discuss Invesco Fixed Income’s view of how the situation could affect US macro fundamentals, and I highlight the potential impact on fixed income markets.

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