- Fixed Income Portfolio Manager
Skip to main content
- Funds
- Insights
- Capabilities
- About Us
- My Account
The 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.
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.
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.
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.
No more free lunch: Impact of higher interest rates on private equity
Continue readingThe US immigration crackdown: Weighing the economic implications
Continue readingURL References
Related Insights
Stay up to date with the latest market insights and our point of view.
CLO equity returns in a tight spread environment
Our CLO experts discuss CLO equity investing in today's tight spread environment, focusing on arbitrage, optionality, and income potential.
No more free lunch: Impact of higher interest rates on private equity
We explain what the direct and indirect rate exposure of buyouts, venture capital, growth equity, secondaries, and fund-of-funds mean for investors.
Private credit roundtable: Outlook in 2025
Our private credit experts explore the potential effects of Trump 2.0 policies — like tariffs and deregulation — on the asset class in 2025. In addition, they dive into the impact of higher-for-longer interest rates, the broadening of private credit markets, and much more.
The US immigration crackdown: Weighing the economic implications
As the details of new US immigration policies come into focus, Macro Strategist Juhi Dhawan considers the risks they may pose for the labor market and the broader economy.
Fed in holding pattern
Fixed Income Portfolio Manager Jeremy Forster unpacks the US Federal Reserve's decision to pause its interest-rate-cutting cycle.
Executive Summary 2025: Finding opportunity amid uncertainty
In this article, we summarize some of the key findings from our 2025 outlooks, from divergence-driven opportunities to the impacts of AI and beyond.
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.
The Fed’s lessons learned from its COVID response
Fixed Income Portfolio Manager Brij Khurana breaks down the central bank's policy decisions during the pandemic and explains how they continue to affect financial markets.
Is the US economy really that different since COVID?
US economists have been touting the resilience of the post-COVID economic rebound. Brij Khurana dissects several key economic indicators to see what's really changed since 2019.
Did the Fed just make a policy error?
Did the Fed just make a policy error? All things considered, Fixed Income Portfolio Manager Jeremy Forster thinks the answer is yes. Learn why and what the implications could be.
Three macro assumptions that could be just plain wrong
Fixed Income Portfolio Manager Brij Khurana offers his non-consensus take on three entrenched, but potentially flawed, beliefs in today's market environment.
URL References
Related Insights
Loans from Federal Home Loan Banks: An opportunity for US insurers to enhance investment yield and total return
Learn why we believe FHLB loans provide compelling potential for insurers to add alpha or increase yield by borrowing at low rates and benefitting from possible favorable treatment by ratings agencies. In addition, explore examples of customized investment solutions that have the potential to capitalize on these advantages.
Closing the return gap: A new set of “stepping stone” ideas
Multi-Asset Strategist Adam Berger offers incremental, flexible investment ideas that can be combined to help asset owners pursue their goals amid declining capital market return expectations.
URL References
Related Insights