• Outcome: The Fed, as expected, raised interest rates by 25 basis points, to 1.75%. Chairman Powell fulfilled expectations of a more hawkish FOMC, yet quelling concerns of too hawkish a tilt. We believe that the Fed continues to risk being behind the curve in raising rates.
  • Markets: The financial markets remain sceptical of rising inflation and wages. We believe stronger economic activity in Q2, along with tighter labour markets, should drive inflation and wages higher. The FOMC may move more aggressively in raising rates, leading 10-year treasury to 3.5%.
  • How to play the current market phase: Active fixed income managers can potentially mitigate losses through underweighting U.S. Treasuries, diversifying into spread products that offer higher yields, and actively managing duration and yield curve exposures.
  • US fixed income opportunities: We find that short-term corporate markets offer value, after recent sell off. We believe that RMBS (Residential Mortgage-Backed Securities), including both agency and non-agency, potentially offer superior downside protection relative to investment grade corporates. A focus on agency MBS markets potentially provides the added benefit of improving the liquidity. We also view long-term TIPS (Treasury Inflation Protected Securities) and floating rate securities as potential ways to help mitigate interest rate and inflation risk.