On Feb 1, the FOMC meets to decide on interest rates. The Fed has telegraphed 3 rate hikes for 2017, the market is pricing in only a 1 in 4 chance of that happening. The week ahead will feature speeches by various Fed governors including the chair Janet Yellen.
Interest rates probably bottomed in 2013, the duration rally of 2014 and 2015 was probably just a local trend within a new global (rising) trend. While interest rates have risen sharply in the last 2 months, they remain very low and 10-year treasury yield of over 3% will not be a surprise. That said, there is a limit to how much interest rates can be allowed to rise given the debt service of corporate and public America, especially if fiscal deficits are being contemplated. With this degree of uncertainty surrounding dollar interest rates, fixed income investors are advised to hedge or actively manage their duration.
Since 2011, world trade has been declining. Trump’s threatened protectionism merely exacerbates this existing trend. Since the majority of trade is settled in USD, a protectionist US and the repatriation of US corporate profits held abroad will likely create a shortage of USD abroad. This could have serious repercussions for emerging markets who are even more likely to finance their trade in USD.