Authored by Madison Fixed Income and Reinhart Fixed Income
Rising uncertainty around fiscal and trade policy has fueled increased volatility across markets. While we do not view a recession as our base case, rates markets are increasingly pricing in slower economic growth. Across the yield curve, interest rates have moved meaningfully lower, with current market pricing implying three cuts to the Federal Funds Rate in 2025 with another one cut in 2026.
For the foreseeable future, we expect the theme of “volatile within a range” to persist, where sharp moves will be driven by incoming data on inflation, employment, and economic growth. Notably, rates are not yet reflecting a shift to an aggressive easing cycle (recession), further tightening (inflation), or a step up in term premium due to fiscal concerns. This convergence of worries highlights the delicate path the Federal Reserve must navigate.
In the credit market, spreads remain historically tight, though we have seen some adjustment wider in response to a more opaque economic outlook. Long maturity corporate bonds have been the most notable mover, underperforming short and intermediate maturity bonds in recent weeks. With credit spreads already at tight levels, there is not much of a cushion for volatility. Historically, when markets reprice risk after prolonged periods of tight spreads, the adjustment tends to be sudden and sharp.
In Madison and Reinhart Fixed Income portfolios, a high quality bias and preference for defensive names reflects our view that spreads are more likely to widen than tighten amidst the heightened macro uncertainty. In this environment, actively managing risk – including assessing each issuer’s sensitivity to macro factors – remains incredibly important.