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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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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Interest rate outlook: US core inflation may drop below 2% barring tariff-related shocks

Invesco Fixed Income shares its views on rates around the world

Rob WaldnerTime to read: 3 min

US: Neutral. With growing trade worries and above-trend growth, we expect US rates to stay range-bound. Core US inflation slowed in August, and we believe it will continue to slow for the rest of the year. Going forward, we expect softer rental and service costs to drive core consumer price inflation below 2%, excluding tariff-related price increases. Absent any major trade-driven shocks, US growth is likely to remain above-trend for the rest of the year, supported by stronger energy sector capital expenditures, increased job growth and consumption. We continue to see 2018 gross domestic product (GDP) growth reaching around 2.8%, 1% above the long-term sustainable trend. There is a risk of tighter global financial conditions due to trade-related tensions and additional tariffs in the next few months — this may cause asset price volatility that could ultimately benefit US Treasury prices.

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