Fixed Income

Improving job growth keeps Fed rate cuts off the table, but evidence of labor market tightening will be required before rate hikes become part of the discussion.

New Fed Chair, Kevin Warsh, is betting that an AI-driven productivity acceleration will get the Fed out of jail for persistently missing its 2 percent inflation target. But history informs us that while new technology adoption is exponential, total productivity growth is not. So, if Warsh’s bet goes wrong, as is likely, the US inflation overshoot will persist. We discuss the investment implications. Plus, a new trade is short cotton.

Our Portfolio Allocation Summary for May 2026.

So far, there is no evidence of second-round effects from the oil price shock showing up in the US economy. Fed rate hikes are off the table unless those effects emerge.

FOMC participants are coalescing around the idea that the funds rate will stay on hold for some time, an outcome that is now well priced in the bond market and that will not materially change under a new Fed Chair.

We recommend increasing exposure to spread product as the US economy transitions back into a low rate vol regime.

The rates market is moving back into a low vol regime, but with yields at a higher level. This argues for maximizing carry across the Treasury curve.

In this Special Report, we describe how inflation expectations are formed. We then demonstrate that steady state inflation expectations have un-anchored in the UK, are un-anchoring in Japan, and are at high risk of un-anchoring in the US. And we conclude with some implications for bond markets.

Inflation’s underlying trend was headed lower prior to the Iran war. This makes the recent back-up in bond yields look like an attractive buying opportunity.