Very soon — as in this Wednesday — we will know if the Federal Reserve decided to cut its key lending rate (Fed funds rate). Given tame inflation, a fairly big drop in manufacturing activity here and abroad, and Friday’s announcement that US GDP growth for 2nd quarter 2019 is estimated to be 2.1%, there is a high probability the Fed will indeed lower interest rates. In fact, US futures markets have priced in three Fed rate cuts this year. This is a sea change from a year ago, when three interest rate hikes were expeced in 2019.
Even if US interest rates head significantly lower, the yields on US high-quality bonds would still remain competitive and most likely continue to attract buyers worldwide. As the chart shows, an investor currently receives a much higher yield from US Treasuries compared to the bonds of many other major developed economies. In fact, the yields on German and Japanese bonds have turned negative again (meaning investors will get back LESS that the principal amount they invested). Also, underpinning the appeal of US bonds is our status as the world’s largest economy and the US dollar as the world’s reserve currency.
For our thoughts on lower US interest rates and what this may mean for the economy and the markets, please see our Q3 2019 Economic Outlook, released July 18.