- Fixed Income Portfolio Manager
Switzerland, Intermediary
ChangeThe views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
One of the discussion topics du jour is how the credit and equity markets might react to the US Federal Reserve (Fed) interest-rate hikes that are widely anticipated in the coming months. As is often the case with me, I find it helpful here to refer to past hiking regimes and market performances as a sort of guidepost.
The proof’s in the pudding
To wit, I examined the historical returns of both US credit (for this purpose, proxied by corporate high-yield bonds) and US equities (represented by the S&P 500 Index) during the six months before the first rate increase of a Fed hiking cycle through the 12 months after said increase. The data demonstrate that both markets not only performed well heading into the first hike (although there’s some circularity because the Fed likely wouldn’t hike amid sharply falling markets), but also that both were able to sustain their positive performance for nine to 12 months after rate hikes commenced.
Specifically, we can evaluate US high-yield bond performance by looking at the market’s returns in excess of those of duration-matched US Treasuries during six cycles dating back to 1994. As shown in Figure 1, high-yield market results were generally strong leading up to the Fed’s first rate hike, but also remained positive after the onset of rate hikes. US equities sent an even more resounding message, outperforming for well over a year following the first rate hike.
Figure 1
Putting it all together: My takeaway
My high-level conclusion from this analysis? In my view, it’s probably too early for investors to start positioning their portfolios defensively in preparation for a potential Fed-induced economic correction. As Alan Greenspan once famously said, “Monetary policy works with long and variable lags.” It typically takes a year or more after the Fed has raised short-term rates significantly for an economic contraction to set in and for risk assets (including both credit and equities) to respond in kind, sometimes by crashing. That’s precisely why the US yield curve has historically been such a great predictor of economic recessions and market returns.
Thus, I’d suggest waiting until short rates are at or above the level of the 10-year US Treasury yield rate before betting on a recession and positioning one’s portfolio to align with that view.
What could be different this time?
In a word, inflation. The above analysis covers a lengthy (roughly 30-year!) period of secularly declining inflation. By contrast, some of my colleagues currently expect global inflation to stay stubbornly above central bank targets over the medium term (with perhaps some moderation in the next few months). Might persistently high inflation cause central banks to behave differently this time around than they have in the past? Maybe.
To be clear, I don’t think most central banks will tighten monetary policy so aggressively as to risk pushing their economies into deep recession — like former Fed Chair Paul Volker did in 1981 to break the back of double digit inflation — but they may be inclined to accelerate the pace of tightening relative to previous rate-hiking cycles. This is something investors should keep a watchful eye on going forward. I know I will.
Expert
Related insights
Showing
of
Insights Posts
Fed delivers rate cut, but hawkish 2025 guidance sends yields up
Continue reading
3
min
Article
2025-06-30
URL References
Related Insights
Stay up to date with the latest market insights and our point of view.
Read next
Showing
of
Insights Posts
Fed delivers rate cut, but hawkish 2025 guidance sends yields up
Fixed Income Analyst Caroline Casavant examines the outcome of the December 18 Federal Open Market Committee meeting and the implications for rates, inflation, and real growth.
3
min
Article
2025-06-30
Going their separate ways: Capitalizing on bond divergence
Our fixed income experts discuss how to position portfolios for a world of uncertainty and divergence, exploring key themes and evolving bond opportunities for 2025.
7
min
Article
2025-12-31
Trump 2.0: Time to curb your enthusiasm?
How does an allocator navigate markets when so much about the policy landscape is unknown? Our Investment Strategy & Solutions Group offers their views on the new political realities in the US and their global implications, including for equities, bonds, and commodities.
12
min
Article
2025-12-31
Private credit outlook for 2025: 5 key trends
Our private credit experts, Emily Bannister and Sonali Wilson, highlight five critical trends for 2025: the convergence of public and private markets, AI's impact on private credit, the evolving role of banks in lending markets, the impact of higher interest rates, and the importance of financial covenants.
6
min
Article
2025-12-31
New market regime, a new environment for global equities?
Global Equity Strategist Andrew Heiskell characterizes the new market regime, makes a case for shelving the old investment playbook, and shares potential investment implications for equity markets.
Article
2024-06-30
Private credit in a new regime
We explore how a shifting macro backdrop, ongoing banking crisis, and evolving competitive dynamics may create opportunities across private credit markets.
Article
2024-06-30
Credit market outlook: Expect greater opportunities in back half of 2023
Against a backdrop of elevated recession risks and banking-sector stress, Fixed Income Portfolio Manager Rob Burn identifies relative-value sector opportunities in the credit market.
Article
2024-06-30
Fixed income 2023: Will opportunity keep knocking in the second half?
Learn where Fixed Income Strategist Amar Reganti sees opportunities in the fixed income market today and dive deeper into the three key themes he thinks investors should consider going forward.
Article
2024-06-30
A quiet bull market in EM local debt?
Brian Garvey illustrates the recent strength of emerging markets local debt following an extended period of underperformance.
Quick Take
2024-06-30
Global high yield: Attractive entry points could soon emerge
Fixed Income Portfolio Manager Konstantin Leidman shares his outlook for high-yield fixed income for the rest of this year and beyond.
Article
2024-06-30
The “money illusion” economy: Misplaced faith in markets?
Fixed Income Portfolio Manager Brij Khurana shares a skeptical view of US Federal Reserve policy, his assessment of the current market backdrop, and his view of what the future could hold.
Article
2024-06-30
URL References
Related Insights