As is well known, this week we received news from the U.S. Federal Reserve, which, while it is true that it kept its policy rate unchanged within the 5.25–5% range, is already firmly pricing in an additional 25-basis-point hike by the end of the year. Furthermore, the Fed expressed optimism regarding its growth forecasts, both for the end of 2023 (from 1% to 2.1%) and for 2024 (from 1.1% to 1.5%). In addition, the terminal rate forecast for 2026 was released for the first time, coming in at 2.9%, above the neutral rate for the U.S. economy of 2.5%.

All of this led to a significant sell-off in dollar-denominated rates, marking a major milestone for the 10-year Treasury yield, which hit a high of 4.50%—a level not seen since 2007—resulting in a negative return of -1.2% for the Treasury index this year. It seems excessive that investors with exposure to this asset class are now facing their third consecutive year of losses, and one tends to think that at some point there should be at least one year of respite. However, it is clear that this year will not be the one—at least not given the Fed’s current projections and the aggressive tone it has been adopting lately.

The truth is that exposure to investment-grade (IG) and high-yield (HY) corporate bonds has served as a significant buffer against these sharp rises in interest rates, as the spreads on these instruments have narrowed by 20–30 basis points. That said, in absolute terms, entry points will continue to present themselves for the remainder of the year, and while we partly regret that those who have already invested in these assets are suffering losses, all is not lost, and it is clear that opportunities to achieve good long-term returns will remain available.

Adolfo Erpel

Fixed-Income Trader