July 23, 2024
The need to rigorously examine conventional market wisdom appeared clear in the first half of 2024, when investors had to rapidly price out expectations for interest rate cuts.1 In recent weeks, consensus has emerged that the Fed will soon embark on a significant rate cutting cycle. We question the need for a first rate cut in September and feel the FOMC may still wish to gain further confidence that rate cuts do not jeopardize the progress that has been made toward their 2% target. If our view that a more gradual and later rate cutting cycle prevails, what then may be the implications for fixed income markets? A high cost of debt would likely remain an impediment for bonds and loans with floating rate price structures. We believe the bigger problems may lie in commercial real estate and private credit. On the other hand, a likely benefit for fixed income investors is more attractive returns, which have historically been positively correlated with starting yields. Further, the election could be a wild card for US bond markets, as they have historically rallied the year after presidential elections. But history and today’s tight spreads highlight the importance of rigorous credit analysis as the stress of elevated rates builds across the economy.
(1) As of 24 July 2024.
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