Think interest rates are headed higher? Most people do, but a 3.25 percent yield on the 10-year Treasury could be the peak for the current cycle.

That contrarian perspective comes from Michael Collins, senior portfolio manager at PGIM Fixed Income. All signs point to a global economy that is on a declining trajectory and returning to levels experienced during the New Normal period from 2010 through 2016.

Collins says it’s possible that the Federal Reserve raises the fed funds rate to 3.0 percent in the next year. But the notion that we could witness more than five rate increases over the next three years doesn’t square with reality, in his view and that of many others at PGIM, Prudential’s asset management arm.

Yesterday, the IMF said global growth is expected to slow noticeably in 2019. While the U.S. economy remains stronger than those of the rest of the developed world, Collins thinks it could slow to 2.0 percent next year or even 1.5 percent by 2020.

Many fixed-income professionals believe 10-year Treasurys could yield 4.0 percent or even 5.0 percent by 2020. Collins thinks they are far more likely to be near 2.5 percent. He was interviewed yesterday immediately after Fed chairman Jerome Powell spoke but it was clear that his views reflected a contrarian perspective developed over time, not a quick reaction to minor wording changes from the nation's top central banker.

What keeps him up at night? “Our biggest fear is that interest rates [ultimately] follow the trajectory of the last 30 years,” Collins says. That trajectory is one of secular decline in interest rates. “It’s a really bad scenario for banks, insurance companies, pension plans and retirees.”

Just look at Europe and Japan, neither of which has been able to raise interest rates since the financial crisis. Come the next recession, they have few weapons in their arsenal besides negative interest rates. At least America isn’t there—yet.

Even in the U.S., potential GDP growth is a lot closer to 2 percent than 3 percent, he argues. The days of 4 percent growth are over. The boomlet that the U.S. economy enjoyed over the last two quarters owes a lot to fiscal stimulus from corporate tax cuts. However, that should fade in 2019 and could become a drag by 2020.

But now the public sector is levered up, as are major parts of the private sector. As a bond fund manager with extensive experience in high-yield securities, Collins says, “We are looking at pockets of the credit markets that have seen the most egregious behavior.”

The triple-B-rated sector of the bond market, one level above junk, is huge and presents risk on both sides. Some industrial companies, just above a junk rating, and leveraged loans, generally classified as junk, both are on the leading edge of potential trouble spots. However, Fed chairman Jerome Powell has acknowledged there are problems but also has said these issues don’t appear to be systematic.

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