The Federal Reserve’s Jerome Powell cautioned against hopes of aggressive rate cuts this week, leaving investors to reassess their 2025 outlooks. Rick Raczkowski, portfolio manager, relative return team, Loomis, Sayles & Company, discussed how the team views interest rates, the economy, and fixed income investing looking ahead in a recent video.
Although interest rate cuts are underway, recent comments from Federal Reserve Chair Jerome Powell dampened market enthusiasm. In a speech on Thursday, Powell noted the strength of the economy when discussing a cautious approach to rate cuts looking ahead. When measuring economic indicators, the team at Loomis, Sayles & Company plans to keep a close eye on CPI, PCE, and the labor market as a whole. However, they’ll specifically be looking at housing as it relates to inflation.
“Housing has been one of the biggest drivers of inflation in this cycle,” explained Raczkowski. “Now, we’ve been encouraged by some of the real-time rent data, which has been coming down and flowing through the inflation gauges with a lag.”
The Credit Cycle and Duration
Raczkowski believes the U.S. is in the late expansion phase of the credit cycle. While the economy and consumers continue to prove resilient, stress fractures may be encroaching. Small companies and lower-income consumers increasingly feel the effects of aggressive rate hikes. However, the firm still anticipates a soft landing for the economy, a boon for risk markets.
“We do think, though, that the risks are tilted toward the downside, more toward slower growth, slower inflation, and a Fed that has to be more aggressive rather than a hotter economy, faster inflation, and a Fed that’s on pause or starts to reconsider maybe hiking again,” Raczkowski noted.
Raczkowski cautions that credit and spread markets may not be fully pricing in the potential risks when investing in fixed income. That said, the soft-landing environment will prove supportive for the duration. Raczkowski notes that duration still performs should a growth scare or market downturn occur.
Where to Find Opportunities in Fixed Income Markets
The firm believes the best opportunities on the yield curve are currently between five and 10 years. “We think this offers good yield and enough duration to buffer against more negative economic scenarios.”
Beyond the current risk/reward opportunities in duration, Raczkowski also looks to short-duration high yield and financials on the investment-grade credit side.
“In securitized markets, we like CLOs. We think here, you’re getting a good combination of yield and some potential protection against rising rates,” explained Raczkowski. Autos, aircraft leasing, and equipment rentals appear attractive when screening for quality.
Global central banks’ easing creates a compelling picture for investors looking for bonds outside the U.S. Of note, the 9–10% yields on government bonds in Mexico, Uruguay, and Brazil are worth consideration. The firm also monitors China’s ongoing financial and policy stimulus.
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