The last few years have been interesting for the international fixed income market. The rate hike we experienced in 2022 strongly stimulated the adoption of short duration strategies. However, two years later, the trend seems to be reversing. The Treasury curve comparing 2-year and 30-year yields resumed its natural historical trend, returning to positive spreads. This reversal, which we have not seen since January of this year (and previously in June 2022 when the Treasury curve began to invert), was in part driven by the Fed's US rate hikes.

Today, the context is completely different. Last Wednesday, July 31, the FED met and concluded that they would maintain the current rate level (5.25%-5.50%). This, together with the latest US economic data, has resulted in the market anticipating a series of consecutive interest rate cuts. With the current data, a 25 basis point (bps) cut is expected at the September meeting, in November another 25 bps, and finally in December a third 25 bps cut, leaving the rate in a range of 4.50%-4.75%.

In this context, incorporating duration risk makes the most sense. To extend oneself in the same paper curves in which one is already invested, thus assuming the same issuer risk and taking duration risk, today more than a risk, it is a necessity.

It is still time to take longer positions in duration and benefit from the downward trend in interest rates. It is not too late to adjust portfolios and take advantage of the opportunities that this environment presents.

Cristián Zañartu
International Fixed Income Trader