Global Fixed Income Strategy July 2017

Monthly insights and updates from the Invesco Fixed Income team.

Jul 26, 2017 | Invesco Fixed Income

Brave new world order: yield starvation versus (geo) political and policy risks

The 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) – so far, remains unscathed. 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.

Three key themes have emerged, in our view, across geopolitics, national economic policies and the financial markets. We call them the “good, the bad and the ugly”:

  • The good: The synchronized global cyclical upswing will likely continue. This means good growth but inflation generally below major central banks’ targets, encouraging policy normalization but without tightening too much.
  • The bad: Global nominal growth is weak due to trends and structural realities in the developed and emerging markets – adverse demographics and low productivity growth restrict growth.
  • The ugly: Key political and policy threats represent downside risks to the current cyclical upswing: US President Trump’s rhetoric may yet become policy and undermine globalization; China’s monetary tightening to promote financial stability and structural reform may slow global growth; the eurozone is growing above trend, but inflation is below desired levels and Brexit looms as the European Central Bank (ECB) embarks on tapering.

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