We are ending a positive month and half-year for U.S. fundamentals, albeit with a lot of volatility from end to end.

Much of the fall in Treasury yields has occurred in the last 4 weeks, as Fed rate cut expectations have risen to 3 rate cuts this year (we think it will be 2 at best, but don't be surprised if it is only one). (we think it will be 2 at best, but don't be surprised if it is only one).

Some weakness in the labor market and more benign incoming inflation data are behind these movements, although the risk remains that incoming inflation could rise significantly in the second half of the year as higher tariffs eventually feed through to prices.

Indeed, the Federal Reserve itself at its June meeting, raised the median estimate for core inflation at the end of this year from 2.8% to 3.1% (which is still above the 2.0% target).

Otherwise, we continue to believe that Trump's fiscal blueprint will, at best, continue to add to volatility in U.S. fundamentals on the long side of the curve, andwill, at best, continue to add volatility in U.S. fundamentals on the long side of the curve, and, at worst, upward pressure as the fiscal deficit consolidates and term premia rise. at worst, upward pressure as the fiscal deficit consolidates and term premia increase.(SEE)

So, after a 30 bp drop in the 10-year treasury yield during the first half of the year, we are skeptical that we will see further bearish consolidation, we are skeptical that we will see further bearish consolidation.

We continue to recommend positioning in the middle part of the curve (up to 5 years) in both sovereign and investment grade credit. (up to 5 years) in both sovereign and investment grade credit, where although spreads are compressed in historical terms, we see little upside risk, as corporate balance sheets are solid and recession probabilities have receded.

That's in terms of the balance of 1H25 and our first look ahead to the second half of the year for fixed income markets. Next, we will delve into the various scenarios for the fed funds rate going forward and their market implications.

Many suggest that the Fed's rate cuts could allow markets to ignore any potential slowdown in activity, but not all Fed easing scenarios could be positive for markets.

• The logic that bad economic data is good data for the market is quite questionable and has limits. If activity weakens substantially and in particular the labor market (risking a recession), the Fed will privilege its full employment mandate. This would be the most bearish scenario for rates, but also bearish for equities.. But judging from the incoming data and less restrictive financial conditions in the market today, we believe the probability of this scenario is low.

• However, if rate cuts occur in a context in which inflation remains under control and growth is resilient, it is certainly a positive scenario for risk assets and rates would remain within recent ranges (which is currently the prevailing market scenario). and rates would remain within recent ranges (which is the scenario currently prevailing in the market).

• But there is one scenario that we do not rule out that would be bad for rates and equities.. Trump's increasing pressures on Powell to lower interest rates, at a time when uncertainty around tariffs and trade policy remains high and may not go away completely, puts the Fed's credibility and the anchoring of inflation expectations at risk, with the consequent impact on interest rates, at a time when equity valuations, particularly in the US, are quite challenging.

With respect to trade negotiations, the news flow has been generally positive. The most recent precedent has been U.S. Commerce Secretary Howard Lutnick's statements on the progress of the U.S.-China trade agreement. However, it is important to keep in mind that the net result is still a much higher tariff outlook than we have had in decades.. According to JP Morgan estimates, we could end up with an effective tariff on U.S. imports of 17.5% once all Section 232 investigations are concluded, up from 2.3% at the beginning of the year.

So then, if the Fed cuts rates despite rising inflation, it could jeopardize its credibility. This is especially since President Trump has vehemently urged the Fed to cut interest rates. If investors begin to doubt the Fed's independence, this could lead to a significant increase in risk premiums.

Still, we see some cut in the second half of the year as likely, but less than what is implicit in prices today.. The Fed's latest economic projections are more consistent with a stagflationary scenario. stagflationary scenario with weaker growth and higher inflation in the second half of the year. If this outlook gains traction, markets are not priced for that and investors will be disappointed.

Humberto Mora

Investment, Finance, and Business Manager; Stockbroker