Summary
It is widely believed that the central bank will kick off a series of interest rate cuts. That should be good news for bond investors. The big unknowns are how far bond yields will come down, and at what pace.
A month ago, the markets expected only a 4% chance of a 0.5% rate cut. But in the wake of a weaker-than-expected jobs report, recession fears flared and expectations grew for bigger rate cuts.
The next question is how the intersection of economic growth and Fed policy will play out in the market. A key debate is whether to position portfolios to be more sensitive to changes in yield.
Differing Views on Credit Risk. Funds are betting on non-US government bonds at risk of default. This generally involves investment-grade corporate bonds, high-yield bonds, or other securities.
“We’re overweight credit risk, and we think it will serve as a nice hedge to be a little bit overweight duration,” he says. “There’s a limited upside, but we also feel there’S a limited downside,’ he adds.