Anne Greenwood, Institutional Portfolio Manager on the BlueBay U.S. Fixed Income team, discusses how the Fed is expected to hold rates steady while geopolitical tensions and heavy credit supply create near-term headwinds, prompting a defensive posture favoring shorter-dated bonds.
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Good afternoon, and welcome back to The Weekly Fix. Markets started off the week with a more subdued tone on the back of this weekend’s events. Treasuries remain stable ahead of this weeks Fed policy decision and credit spreads are back to record tights as investors gear up for key earnings results out of the tech sector starting tomorrow.
We anticipate the Fed will keep rates steady this week as policy stability takes hold near the end of the rate cutting cycle. We still maintain the view that we could see up to 3 more cuts in 2026, but expect those to materialize later in the year as new leadership takes over at the Fed.
Political tensions remain elevated both domestically and abroad putting continued upward pressure on the long end of the US yield curve. This, combined with a potential reacceleration of growth and stickier inflation, reinforces our view that we are in or moving into an environment of structurally steeper yield curves. As a result, we continue to favor shorter dated, convex assets, like fixed rate high yield and investment grade bonds as well as securitized and CLO structures that should benefit from a moderate trend lower in front end interest rates.
In credit, all eyes are on earnings and supply as companies emerge from blackout periods and enter a seasonally heavy new issuance window. This is likely to be exacerbated by the massive amount of capex and data center spend needed to keep up with increasing AI driven compute demand. M&A deal making is also likely to pile on throughout the year as companies continue to rely, at least in part, on debt financing to fund record levels of M&A activity.
Fundamentals remain sound, but a handful of large bankruptcies in the last few months is keeping bond investors vigilant. We are also starting to see more data points of write downs and material losses being realized in private credit books. While we do not believe this will become a systemic risk, we are wary that the sector will continue to deliver sufficient returns to investors and could see increased volatility seep into the public markets as a result.
All in all: a stable to modestly accommodative Fed, strong corporate fundamentals and a tight labor market should continue to support risk assets. However, heavy supply, increasing dispersion within credit markets, and geopolitical tensions are likely to weigh on spreads in the coming weeks. Ahead of this, we are staying relatively close to home on generic credit risk and holding amply dry powder to take advantage of what is likely to be a bouncy first quarter and beyond.
That’s all for this week’s episode of The Weekly Fix, thank you for tuning in.
Key points
Fed Policy & Rates: The Fed is anticipated to keep rates steady this week, with up to 3 potential cuts later in 2026, supporting a structurally steeper yield curve environment.
Market Positioning: Strong corporate fundamentals and tight labor markets support risk assets, but investors should favor shorter-dated, convex credit instruments given expected front-end rate declines.
Near-Term Risks: Heavy new issuance, tech earnings volatility, geopolitical tensions, and emerging private credit losses are pressuring spreads, warranting a cautious stance to capitalize on potential Q1 volatility.