The first U.S. Presidential debate held in late June, was an initial glimpse into bond markets digesting a potential Republican win. The yield curve steepened on the day and are at a crossroads of radical party proposals and a move towards a dovish Fed. While hardline policies are unlikely to be enacted, the prospects for a steeper curve with higher long-dated rates are likely in the coming twelve months.
Continued shakeout of candidates and policies and softening economic data present opportunities to selectively increase fixed-income exposure.
Longer-dated yields, evidenced by the U.S. 10-Year Treasury, rose by nearly 0.2% after the debate, while also seeing the lowest year-on-year PCE inflation print. However unlikely, Republican proposals to remove income tax and replace with tariffs would be highly inflationary. Tighter immigration controls, while potentially easing unemployment pressure, would hamper GDP and productivity growth. Higher deficits, alongside dwindling demand for Treasuries issuance, would result in a higher for longer (long-dated yield) rate environment. It is also plausible that additional influence is imparted on the ‘independent’ Fed. This would culminate in falling short-dated and higher long-dated yields.
With a softening trend solidifying in both inflation and labor data, the Fed could be in a position to cut rates in September (futures estimating an 80% chance). Outside of Treasuries, Investment Grade corporate bonds and quality high yield, while spreads are tight, remain attractive as interest rates fall and refinancings occur. Unlike Credit and Treasuries, Municipal yields have not reacted to political rhetoric. Municipal’s continue to offer an attractive opportunity given higher short and long-dated yields. We remain constructive that central banks will enact dovish policies against moderating political overtones and see opportunities to tactically extend duration as the yield curve steepens.
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This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks, including changes in credit quality, liquidity, prepayments, and other factors. REIT risks include changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, supply and demand, and the management skill and creditworthiness of the issuer.
