The global economic environment is improving. Growth is running modestly above trend across many countries and regions, a phenomenon that has not occurred in many years. We have to look to periods before the global financial crisis of 2007-08 to find an expansion this broad-based. However, fixed income markets may be too optimistic that these favorable conditions can continue for an extended period.
In our view, the global economy must continue to operate in this narrow band of “just right” to support current credit market valuations that remain elevated. Should growth momentum accelerate and break out above recent ranges, this would likely trigger more aggressive policy responses by global central banks. The resulting tighter monetary policy, delivered via higher policy rates and a faster withdrawal from quantitative easing, would likely hamper growth.
- We expect U.S. interest rates to remain range-bound with the 10-Year Treasury yield hovering in the range of 2.25% to 3%.
- Even as they tighten monetary policy, the bias of central banks remains supportive of economic growth.
- With inflation muted and growth rates modest, we expect the Fed will take a gradualist approach.
- Municipal bonds continue to offer tax-advantaged income and diversification potential, but total return potential is likely to moderate and volatility could rise.