Global fixed income: What market threats lie ahead?

We assess ‘the good, the bad and the ugly’ trends we see across the globe

Arnab DasThe world economy and financial markets have been buffeted over the past year by national and geopolitical shocks, yet the current synchronized upswing across the world’s largest economies — the first since the global financial crisis (GFC) — remains unscathed so far. Growth is up but inflation is low, and major central banks remain accommodative amid monetary policy normalization in the US. Asset price valuations are stretched, yet yield hunger — if not outright yield starvation — persists.

In the view of Invesco Fixed Income, three key themes have emerged across geopolitics, national economic policies and the financial markets. We call them the “the good, the bad and the ugly.”

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Despite little help from Washington, a positive outlook for US credit

Fundamentals and global demand are providing support for the asset class

The financial markets started the year enthusiastically after the US presidential election, but momentum appears to have peaked as reality has set in. As political debates play out in the second half, Invesco Fixed Income expects credit markets to remain well-supported by foreign demand as global central bank policies have produced meaningful interest rate differentials, despite growing hedging costs. In addition, debt issuance will likely be contained, in our view, as debt-funded merger activity is anticipated to decline with the return of global growth impulses. Our active research process leads us to varying views on key sectors, which we will highlight in this outlook.

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The US debt ceiling saga returns

US short-term bond markets could be choppy as Congress seeks to resolve the looming issue

Once again, the US debt ceiling is in focus. Since March, the US Treasury has been employing “extraordinary measures” to fund the US government, such as halting contributions to certain government pension funds and borrowing money set aside to manage exchange rate fluctuations. But those measures are expected to run out this fall.

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Interest rate outlook: Long-term US rates now more dependent on global monetary policy

Invesco Fixed Income shares its views of rates around the world

US: We expect solid US economic growth to continue, and we believe inflation is likely to remain low for the next several months before moving higher in 2018. This does not affect our forecast for the US Federal Reserve (Fed) to begin tapering its reinvestment program in September. However, inflation data will be critical in determining when the Fed raises the federal funds rate again. If inflation stays low, this may not occur until mid-2018. In our view, global monetary policy will continue to be the main driver of long-term US rates, with tighter European Central Bank (ECB) policy and a rising global term premium likely to push them higher by the end of this year.

Europe: Economic growth in the eurozone has

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Currency outlook: Strong global growth drives central bank policy convergence

Invesco Fixed Income shares its views of currencies around the world

US dollar: Our expectation for strong global economic growth suggests that the performance of the US dollar should be mixed. Strong global growth implies that non-US growth should be accelerating. In our view, this means that foreign central bank policy is likely to converge toward that of the US Federal Reserve, creating an environment in which the US dollar underperforms currencies of countries experiencing an economic resurgence.

Euro: We believe there is

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Interest rate outlook: US inflation data unlikely to deter Fed from September tapering

Invesco Fixed Income shares its views of rates around the world

US: May’s US inflation data surprised to the downside for the third month in a row. While we expect US growth to continue at a solid pace, inflation is likely to stay low for the next several months before moving higher in 2018. We do not expect the downside surprise in inflation to delay the beginning of the Federal Reserve (Fed) plan to begin reinvestment tapering in September. However, future inflation readings will be critical in determining when the Fed raises the federal funds rate again. If inflation stays low, this may not occur until the middle of 2018.

Europe: We remain

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