Interview, Fireside Chat, Webinar
“We Like Bonds”
- The economy is projected to avoid a sharp decline despite softer data, with the Federal Reserve expected to implement two rate cuts next year while removing January cuts from its forecast.
- Labor market dynamics are anticipated to remain a primary Fed focus, with no expectation of a sharp deterioration given the noise caused by the government shutdown and deferred resignations, though a significant slowdown would favor duration.
- The Federal Reserve is expected to complete its "insurance cuts" program in December, positioning itself to support investors regardless of whether the economy follows a strong path driven by AI productivity gains or a weaker path involving labor market rollovers.
- Central bank policies are diverging globally, with the Bank of Japan expected to hike rates and other central banks signaling the end of cuts with potential hike probabilities, while the Fed aims to control the front end of the yield curve.
- Bond performance outlooks vary by duration and asset class; intermediate duration and 5-year segments are expected to outperform or offer access to corporates and structured products, whereas 20-to-30-year U.S. bonds may struggle due to rising global term premia and potential yield rises.
- Corporate credit is not expected to offer superior returns over duration given tight credit spreads at 10-year percentiles, while the current yield environment provides a solid base case for returns if economic conditions remain static.
- In specific scenarios, AI-driven productivity gains are viewed as disinflationary, supporting bond performance through tighter spreads and eliminating the need for Fed hikes, while a dovish Fed chair could further benefit duration in a weakening labor market.
- Market events for the week of late December are expected to be light, with the November jobs report and government shutdown-related data noise viewed as non-indicative of structural breaks, leading to expectations of a stable bond market.