Andrzej Skiba, Head of BlueBay U.S. Fixed Income, discusses the market implications of monetary policy trends.
Watch time: 2 minutes, 51 seconds
View transcript
Welcome to the latest edition of The Weekly Fix. My name is Andrzej Skiba.
As we’re approaching the next FOMC meeting, we wanted to update investors on our thinking regarding US monetary policy. We expect no rate cut in July, followed by 1-2 cuts before year-end assuming no major trade escalation after the August 1st tariff deadline. Were that to happen, a no cut scenario could be back on the table.
The reason why our base case assumes rate cuts later this year relates to the fact that the underlying inflation picture is relatively benign. We note that lower than expected shelter inflation is particularly helpful in this regard. Still, some of the tariff-induced pressure will soon manifest in data offsetting some of these recent benefits.
Beyond the focus on timing and magnitude of cuts, we think that markets will increasingly shift attention to Fed policy direction after Chair Powell’s term expires in May 2026. We agree with the expectation of more aggressive rate cuts ahead under the new leadership. In this regard, we think that the reaction of the Treasury market to recent false rumors regarding Chair Powell’s immediate future was telling. Front-end of the curve rallied hard on rate cut expectations, however back-end sold off as aggressive rate cuts would be inflationary and raise questions about US monetary policy at a time when fiscal deficit remains elevated and Treasury issuance particularly heavy. This cements our preference for US curve “steepeners” across our fixed income portfolios.
In the meantime, this dovish shift in forward rate cut expectations seems to have triggered a wave of buying across the credit markets. Investors are keen to lock in current yields and are deploying capital accordingly. Coupled with limited primary market issuance, this creates a strong underlying technical backdrop across credit markets. While generic spreads don’t look particularly appealing, we take advantage of our active management approach and focus instead on identifying remaining pockets of value.
Thank you for your attention.
Key points
The Fed is unlikely to cut rates in July but may implement 1-2 cuts by year-end, depending on trade developments and benign inflation trends, though tariff pressures could offset some benefits.
Markets are focusing on Fed leadership changes in 2026, with expectations of more aggressive rate cuts under new leadership; this has influenced Treasury market dynamics and supports a preference for US curve “steepeners”.
Dovish rate cut expectations have spurred credit market buying, creating a strong technical backdrop; active management is key to identifying value amid unattractive generic spreads.