A Stabilizing Rate Environment

Our 2020 Vision

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By John Lovito - First Quarter 2020

The U.S. Federal Reserve (Fed) kept its target-rate range unchanged in January—a move widely expected by markets. This is in line with what we think will generally be a more stable interest rate environment in 2020. I definitely think it’s going to be a less exciting year than 2019.

That doesn’t mean we lack opportunities. Find out which area of the world I like with regards to rates.

Central Bank Policy; Steady as it Goes

If you look back to this time last year, we thought the Fed was going to continue its rate-increasing trend. But then that policy quickly reversed in the first half of 2019, and we experience a much different year than what we were expecting.

At this point in 2020, I’m expecting fewer fireworks. Even outside of the U.S., we’re expecting central bank policies to be steady as it goes. The European Central Bank (ECB) just reembarked on quantitative easing, continuing throughout 2020 and probably 2021. That means rates are going to stay low for quite a while in Europe; the same will be true for the Bank of Japan.

Post-Brexit Still Uncertain for the Bank of England

I think the UK had to potential to be a bit more interesting. The country left the European Union (EU) at the end of January, so now we’ll get to see how the UK economy reacts post-Brexit. We can’t be certain what the Bank of England is going to do, but if I had to guess, they’re probably more in the easing mode. It’s still up in the air what the economy will do, and that uncertainty may carry into 2020.

Trading Uncertainty for Deals May affect Rates

Trade is likely to dominate investors’ attentions in the first half of 2020. Last summer, rates fell quite a bit when it looked like the U.S.-China trade war was heating up. But then rates stabilized toward the end of the year as the rhetoric cooled off. Now, the U.S. and China have signed a phase one trade deal, causing rates to move a little higher on the positive news. I think the market will be closely watching the trade situation as it develops and any potential effect it may have on rate direction.

Norway May Ease Up in 2020

From the developed part of the world, one country we like is Norway. In 2019, Norway was one of the few countries along with the U.S. that was tightening monetary policy and raising interest rates. Now, it looks as if Norway may begin to reverse its tightening policy in the first half of the year. Bond prices increase as interest rates fall.

All Eyes on the U.S. Presidential Election

In 2020, I think we’ll continue to see moderate growth around the world with U.S. growth leading the way. If there are curveballs, I think it will be related to the U.S. political cycle.

What could happen with regard to the Democrat candidate? It's still a wide-open field. We know who the favorites are right now. We've got Warren, we've got Biden, but there’s potential for another moderate to emerge—that could be a curveball. Or we may be surprised with the presidency going to Bernie Sanders, which would be a more of a far-left policy.

So, I would watch what happens in the Democratic race, because a curveball has the potential to significantly change ongoing tax and regulation policies going forward.

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John Lovito
SVP, Co-CIO
Global Fixed Income

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