FIXED INCOME MONTHLY

Make America grow again

Jan 24, 2017 / By Jeffrey Rosenberg

Fixed income highlights

  • Make America grow again. Accelerating the “reflation” theme of our 2017 outlook, fiscal policy reform holds the largest potential to fundamentally alter the low growth, low inflation, low interest rate expectations of the post-crisis environment.
  • Managing the transition. At the core of our focus on fundamental tax reform, the movement towards a destination-based cash flow tax with border adjustments holds the greatest potential for market impact.
  • Low for no longer. Our base case scenarios expect only modest further increases in U.S. rates for 2017 with the consensus view at 2.7% year end. Core fixed income returns modestly below coupon under such an outcome, retaining its important role as ballast in a portfolio allocation with only minimal reduction in expected returns from higher rates.
  • Here comes your 19th nervous breakdown. Our musical theme finds its inspiration in 19th National Congress of the Communist Party of China. The consensus expects policy makers to refrain from any market volatility ahead of the power transition. No one doubts their willingness; rather it’s the scale of the problem that begins to strain their ability.

Make America grow again

After years of bond market focus on monetary policy, our lead theme for the 2017 outlook highlights the central role of fiscal policy for investors. The Trump administration, combined with a Republican congress and a Paul Ryan-led House, suggests an historic opportunity to implement sweeping fiscal reform. Those include regulatory, infrastructure, and tax policy, along with a promised repeal of Obamacare and an eventual replacement. The debate is not about short-term fiscal stimulus leading to a temporary boost to growth. Rather, it’s about the possibility of changing the long-run outlook for potential growth. The dramatic increase in interest rates post election reflects repricing, not of the expected outcome, but a change in the distribution of future outcomes to incorporate higher growth scenarios.

Jeffrey Rosenberg
Chief Fixed Income Strategist
Jeffrey Rosenberg, Managing Director, is BlackRock's Chief Fixed Income Strategist with responsibilities in developing BlackRock's strategic and tactical views on sector ...