Interest rate outlook: US inflation uncertainty likely to keep a ceiling on Treasury yields

Invesco Fixed Income shares its views on rates around the world

Interest rate outlook: US inflation uncertainty likely to keep a ceiling on Treasury yields

Time to read: 2 min


Inflation continues to firm, although we do not see the potential for a significant upside inflation surprise. Near-term inflation will likely be sufficient to keep the US Federal Reserve on track to raise interest rates in December. That said, we continue to anticipate ambiguity in the data as a result of hurricanes Irma and Harvey. Although US monetary policy is tightening, we expect uncertainty over inflation to keep a ceiling on US Treasury yields.


We remain optimistic on European growth which, although not fully recovered, continues to benefit from synchronized global growth momentum and reduced political risks. Some monetary policy normalization looks warranted at this stage, and we were not surprised that the European Central Bank recently announced its plan to taper bond purchases to €30 billion per month beginning in January 2018 and ending in September 2018. This announcement could help anchor interest rate expectations and give European governments more time to work on much-needed structural reforms and plans for closer European Union (EU) integration.


The onshore government bond yield curve bear steepened in the first half of October as better-than-expected economic activity and core inflation shifted market sentiment. This was despite stable funding costs and loose liquidity conditions in the interbank market. President Xi’s speech at the 19th Party Congress pointed to a quality-focused growth strategy and potentially further emphasis on strengthening financial regulation. In our view, this suggests slower credit growth and a lower economic growth target.


The Japanese economy continues to perform well, aided by a rise in consumption and exports. We expect this momentum to continue as wages edge higher, foreign demand remains robust and companies invest in their infrastructure. Prime Minister Abe’s recent election victory should pave the way for more economic reforms that could further boost Japan’s potential growth. With Bank of Japan Governor Kuroda’s term due to end in April 2018, the prime minister must decide whether to ask Kuroda to stay on for another term or replace him. Either way, we expect Japanese monetary policy to remain loose in the near term. We expect 10-year Japanese government bond yields to range between 0% and 0.1% through year-end 2017.


The Bank of England (BOE) increased interest rates by 25 basis points at its November meeting. We view this action as a removal of the emergency stimulus introduced after the EU referendum rather than a reaction to an overheating economy. The UK’s growth rate has declined meaningfully since the referendum, the pound has declined and inflation has moved considerably above the central bank’s 2% inflation target. The labor market is very tight and while there are no immediate concerns over wage pressures, these could emerge swiftly. The BOE will likely continue to weigh these factors against downside risks emanating from Brexit talks. There is an additional 25 basis point hike priced into the bond market for the duration of 2018. We believe this appears reasonable, so we maintain a neutral bias on UK rates for now.


After raising the target overnight rate 25 basis points at each of the previous two meetings, the Bank of Canada (BOC) kept the rate unchanged at its meeting on Oct. 25, 2017. While growth has remained strong, it slowed from the second quarter and the BOC appears ready to give its two previous rate hikes time to filter through the economy before taking further action. Additional uncertainty around the breakdown in North American Free Trade Agreement negotiations leaves the BOC cautious regarding future hikes. The Canadian 10-year yield appears to have peaked for the moment, and yields have several reasons to fall from current levels, in our view.


The Reserve Bank of Australia (RBA) appears satisfied to leave interest rates steady. Labor data continue to improve but the unemployment rate, even as it begins to decline, remains stubbornly high. Elevated consumer debt levels and slow wage growth will likely continue to constrain consumer spending. Low levels of inflation and a continued robust housing market should keep the RBA on hold in the near term. We remain neutral on Australian interest rates.

Rob Waldner, Chief Strategist; James Ong, Senior Macro Strategist; Noelle Corum, Associate Portfolio Manager; Sean Connery, Portfolio Manager; Brian Schneider, Head of US Rates Portfolio Management; Scott Case, Portfolio Manager; Reine Bitar, Macro Analyst; Ken Hu, CIO Asia Pacific; Yi Hu, Senior Analyst; Alex Schwiersch, Portfolio Manager

Important information

Blog header image: Bill Perry/

A basis point is one hundredth of a percentage point.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

The performance of an investment concentrated in issuers of a certain region or country is expected to be closely tied to conditions within that region and to be more volatile than more geographically diversified investments.

Robert B. Waldner, Jr., CFA
Chief Strategist and Head of Multi-Sector

Rob Waldner is Chief Strategist and Head of Multi-Sector for Invesco Fixed Income (IFI). Mr. Waldner has overall management responsibility for the IFI public credit asset class teams and the Multi-Sector team. In this role, he is responsible for oversight of the portfolio construction process for IFI’s public security portfolios. Mr. Waldner chairs the IFI Investment Strategy team and is responsible for oversight of the overall IFI investment process. He joined Invesco in 2013.

Prior to joining Invesco, Mr. Waldner worked with Franklin Templeton for 17 years. At Franklin Templeton, he was a senior strategist and senior portfolio manager. He was the lead manager for Franklin absolute return strategies, and a member of the Fixed Income Policy Committee. Mr. Waldner was instrumental in the launch of a number of new strategies on the Franklin Templeton fixed income platform. Previously, Mr. Waldner was a member of the Macro team at Omega Advisors and a portfolio manager with Glaxo (Bermuda) Ltd. He entered the industry in 1986.

Mr. Waldner earned a BSE degree in civil engineering from Princeton University, graduating magna cum laude in 1986. He is a CFA charterholder.

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