Madziyire: We don’t agree with the market pricing. The difference between headline and core personal consumption expenditures inflation is usually about 50 basis points, so an expectation of 2.4% would imply core inflation of about 2.0% two years from now. That’s going to be hard to achieve.
Our active team is taking a strategic view. If you think about it, the Fed and other central banks will have to pivot at some point. You typically start to see these turns occur two hikes, or two meetings, before central banks stop raising rates. We think we’re getting close to this point, maybe by the end of this year or early next year, when the Fed will be done with the hiking cycle. So we’re looking at steepener trades—buying the shorter end of the curve and selling the long.
Shaykevich: I have a hard time ruling out a reacceleration of the U.S. economy. What happens if you have more growth into a market with full employment, with high demand for energy and commodities? You could have inflationary pressures that do not come down as people expect.
Considering both upside risks to rates and downside risks to growth, we have reduced our credit position to a more neutral level. With sufficient dry powder, you can be in a good position to take advantage of opportunities.
The markets have priced in certain terminal rates in the federal funds rate. But if economic data force the market to contemplate the terminal rate at higher than 4%, credit spreads would likely widen with lower-rated credit getting hit disproportionately hard. It doesn’t mean the terminal rate has to go to 5%, but the market considering that possibility would create stress.