Global Market Outlook

Late U.S. Rate Cycle Could Favor Certain Sectors

Andrew McCormick, Head of U.S Taxable Bond Team

Executive Summary

After an extended period of “easy money,” liquidity may be past its peak in the U.S. As the Federal Reserve shrinks its balance sheet and raises short-term rates, we foresee a shift in the U.S. fixed income market from mid cycle to late cycle–a phase in which investors are unlikely to get paid as much for taking risk and attractive investment opportunities will be harder to find. That said, there are several sectors that may be positioned favorably in a late-cycle environment.

Key Highlights

  • In 2018, floating rate bank loans delivered the best risk-adjusted returns within the fixed income asset class.
  • High yield emerging market (EM) debt and investment grade EM debt tend to perform well on a risk-adjusted basis in the late cycle.
  • The dollar had a very strong run in 2018. Will this continue as the Fed begins to pause or end its tightening cycle?

Important Information

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This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of January 2019 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

T. Rowe Price Investment Services, Inc., Distributor.

© 2019 T. Rowe Price. All rights reserved. T. Rowe Price, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.

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