Anders Faergemann:

We are now facing a fork in the road on the US economy, US exceptionalism and US assets; which are raising doubts over the US dollar direction, at least for the short term. We're recording this podcast on the 15th of April, and this morning, US Treasury Secretary Scott Bessent reassured investors that foreign bond holders are not dumping US assets, and the administration still has a strong dollar policy.

So what does that tell us about last week's market panic and concerns about market stability going forward?

Welcome to the PineBridge Investments Podcast. I'm Anders Faergemann, with me, as usual I have Hani Redha. And today, we're excited to welcome our first guest on the show PineBridge’s Head of Development Markets, Investment Grade Fixed Income, Rob Vanden Assem. So welcome Rob to the show. Rob, welcome, we want you to sort of give us your perspective on the US rates market and the Fed.

But first, Hani, may I ask you to start by just outlining your view on the macro outlook. What factors are you most focused on from a top-down perspective?

Hani Redha:

Sure, Anders, thank you. I think this is a period where we're clearly very forward focused and the data we look at right now, the backward-looking data, is really much less important. But for completeness, what we're seeing in the hard data so far is mixed, but overall, quite decent. We came into this here at actually a good growth level. The higher frequency data, such as credit card spending, seems to show that we did have a bit of a soft patch early in the year, some of it was weather related, temporary stuff, and has recovered. So we're going into this shock, this stagflationary shock that you described, from a decent starting point.

So, I think that's the key thing to take away from the backward-looking data. That said, the forward looking indicators are quite concerning I'd say, with really bad sentiment across the board, whether you're looking at consumers or corporates, and we would keep a real close eye on the wealth effect, which we mentioned in our last discussion, as something that could amplify any slowdown in consumption because of the concentration of wealth that has been driving overall consumption in the US. So, at a minimum, let's say we're looking at a pretty sharp slowdown in both consumption and investment at the same time as attempting a pullback in fiscal spending in the US. So, it's fairly challenging. But the key thing for us to do is gauge the magnitude of the slowdown and how that unfolds.

But that's a top-down view. I think, with that said, it'd be great to pull in Rob here, to start by getting your bottom-up view, Rob, from the discussions you have with management, with corporates, how do you see this outlook? How do you see them navigating through this period?

Rob Vanden Assem:

Thanks, Hani. It certainly is a trying period. The feedback we're getting is that they don't really know, they don't really know the full impact that they will feel, because obviously it's a day-to-day dynamic with the negotiations going on with most, except for China, it's pretty much uncertain. There are nevertheless, particular sectors that have been impacted more severely recently, obviously, autos would be the most. Various others have been talked about. But generally speaking, what we've seen is how it would typically react as fears of recession approach, with some of the more cyclical names, underperforming. Energy, particularly getting hit, as well as the combination of drill-baby-drill, with the potential recession hits.

So, in terms of how they look ahead and say they want to navigate this situation, I think it's more of a “ham-and-egg” situation, you might say, where they're going to see how it works out. They have certain other plans and alternatives that they can use if things actually continue on longer than they will. So, when you see the full impact of the tariff, that which will be felt by the company and or the consumer is not that full amount it's going to be shared. I think obviously there are other factors as well, whether it be currency or just demand, really, that impact those dynamics. But nevertheless, I think it's very much a wait and see situation, and therefore clarity or the ability to see through this is pretty difficult right now. And I think many companies are just kind of in a wait and see mode.

Hani Redha:

And if I could just follow up briefly on that Anders, I was going to ask Rob just to comment on the labor market, really, that's going to be the decisive factor. And I would presume, for your universe, fairly high-grade companies cutting labor is not going to be the first go-to lever. But how far do you think we are from that? Do we have a cushion before they get to that point?

Rob Vanden Assem:

I mean, yes. I think, you know, at this point, labor has been one of the strengths. However, we also have to consider that a lot of the hiring last year was Government related. So therefore, you know, you're going to see that combined with the slower private sector dynamics kind of impacting labor, I think, as we go ahead. So, it's going to be a consideration to factor in where you’re probably going to see some fairly weak numbers in the not-too-distant future there.

Anders Faergemann:

Maybe I can follow up with you, Hani, what are you seeing from a macro perspective on unemployment? Is that something that you expect to come in sooner rather than later, or is inflationary impact coming first?

Hani Redha:

I would say inflation first. And I think companies come into this from a decent starting point. I think that's what we've been hearing from our colleagues across both equities and credit. And so, companies have room in terms of liquidity and profits that can allow them to weather a bit of the storm first, see what happens. And so, I think the inflation effects would hit us first, and then you'll see, when there's a little more clarity, and when they've taken the hit, the response comes after that.

Anders Faergemann:

Oh, your famous “inflation-stag copyright” coming in there! Rob, can I turn to you and just ask you to zoom out a bit and consider what the Fed would do in this situation, and what would you expect over, let's say, 12 months?

Rob Vanden Assem:

In terms of the inflation aspect. I think the concern is much more on the growth side of things right now. You know, even the Fed has said that they view the inflation situation as transitory, to hear that word again, but that's what they're saying largely. And I think the magnitude is kind of surprising. Nevertheless, I think the view is still there that it's viewed as more of a tax, more of an impact on growth. I think that once we get through this uncertainty, and I think we will get through it, the Fed, in my view, is still bent on lowering rates. They still feel that rates, where they are now, are somewhat restrictive. I think that will give them the window, because we're likely to see some weaker economic numbers coming through at that point where they will lower rates.

Now, what happens to the curve? The curve has steepened out recently, and that's driven, I wouldn't say, by a fear of inflation. There is part of that driving it. However, a lot of it has to do with the twin deficits, really, the trade deficit, the budget deficit, how that's going to be worked out. Because obviously you have a dynamic where you're trying to raise money in tariffs, but at the same time weakening growth. Well, you're looking at a spending dynamic of continuing tax cuts, perhaps increasing them as well, which doesn't work out well for the budget. So, I think the fear has been on supply, and how are they going to handle the supply? And, you know, as a matter of fact, we just got a put announced - in effect - by the Treasury Secretary today.

So, a lot of that has to do with that. And now, typically that only lasts a short period, because the government has to come out and support their plans to successfully issue this debt. I think it was one of the driving reasons last week for the 90-day institution of the tariff pause, because we had a 10 and 30 year auction looking ahead, and if they hadn't done that, it would have been likely a much sloppier auction. So, I think that those factors are, the administration is watching the market, and they want to institute these policies, but they don't want to drive the economy or the markets into a ditch, so to speak. So, I think it's a tightrope act, as we continue to see that, it'll drive volatility. But I think there is a cap on volatility because of that.

Hani Redha:

Very interesting, Rob, I was going to then build on what you're saying there in terms of looking at the long end and the steepness of the curve. Now the market is already pricing four cuts by the Fed this year and another two next year. That's six cuts through the end of 2026. So with that, I hear you on wanting to cut rates, and you know, eventually, as we get through the uncertainty. But what do you think of that, and your assessment of value across the curve?

Rob Vanden Assem:

Well, I think that's a bit aggressive, and I think that's obviously a reaction to what's been going on the last couple of weeks. What I would anticipate would be in terms of curve behavior, as we get through this flattening to reemerge, you might say, as investors are going to be grabbing for yield out the curve. I think that going ahead, the Fed will be lowering rates. At this point, I can't say that we're going to have a recession. Base case is still weaker growth. I think in general, you're looking at about a percentage point cut off the GDP, and so not a recession. So therefore, there's not going to be that need to lower rates that many times. In my view, it's going to be somewhere in the middle.

However, I still think I go back to look at where the real rates will play out at that point, and I'm thinking they want 100 basis points or less in terms of real rates. So, I think they do have three or four cuts in them at this point. We'll have to see how inflation looks at the end of the year. So, I would expect the curve to flatten as I think we get through this period of negotiation on tariffs, and at the end of the day, my view is they want a 10% tariff across the board. They start at 20, they get to 10. There's a lot of other noise, obviously, with regard to China, with regard to punitive tariffs, etc., but I think that's where they want to be. There's that ideal level of tariff rates that I think they're playing to. And I think if they do get there, I think that coupled with any kind of effective extension of the tax cut, where there is some kind of cost cutting as well, will lead to a much better dynamic in terms of the Treasury market. And you will see the short end probably waffle around, but also ultimately begin to become a bit lower.

But at the end of the day, I look at maybe, we're talking about a three and a half, three and three quarters Fed funds, and a 10 year, maybe a bit lower than where it is. But, you know, depending on the dynamics at that point, we're probably not tremendously different, and that's why we're kind of thinking we would likely still be in a range there in the longer end. And so it's a lot of activity, a lot of volatility around a generalized area of, say, three and a half to four and a half percent.

Anders Faergemann:

Thanks, Rob. Hani, that sounds very similar to what we've been discussing, and obviously we are making some changes to our rates forecast. But is there any way you differ in your view from what Rob is saying?

Hani Redha:

I definitely agree with most of what Rob is saying there, especially the fact that at this point, our base case is still that we’ll probably avoid a recession, but it's going to be a fairly close call. We think you're going to see a pretty sharp deceleration, very front loaded and unfortunately, at the same time, we're going to be seeing inflation rising, and I think that means that the Fed will be a bit slower to actually come through with the cuts, and then we'll see those cuts happen, but more back-end loaded as the inflation data peaks, and that's when I would be looking to be more aggressive on adding duration at this point.

I would say, as an asset allocator, I don't really like the correlation behavior, right, with inflation higher and growth lower. When I look at the correlation to equities, that's not very conducive, and so I'd rather be in cash and gold as my hedging instruments, rather than treasuries right now, but I'd be looking to add duration as those inflation numbers peak, because, as Rob was saying, the destination is those lower yields. I just think you can bide your time a bit longer here. I do agree with our 4% new forecast, but that tells you there's not a whole lot of upside from where we're trading right now, and that's why I think you have to be a bit patient before you add duration more aggressively. How about you, Anders, why don't you wrap things up with us, including your own views please.

Anders Faergemann:

As you said, we've moved our 10 year treasury forecast to 4% if we're in a vacuum here, we do expect yields to go lower as the economy slows. And as you point out, Hani, as we move into 2026 we would expect inflation to reverse, and this sort of one-off price level adjustment to reset. And so, with that, it would enable the Fed to be more dovish leading into 26 so we've so far had two cuts from the Fed. We've added another cut as we bring in the second quarter of 2026.

Likewise, we've lowered our rate forecast for the ECB, probably a more clear-cut view, in the sense that we're seeing weaker growth in parallel with disinflation, and so we expect the ECB to carry on its dovish stance. And so, we're adding another two cuts to the ECB, and we'll end up around one and a half percent.

But we're not moving our bunds forecast for the moment. And so, if we bring in the dollar factor into this, while we're seeing a narrow yield differential between the US and Germany, there's a lot of uncertainty around the growth differential. What I would highlight here is that we expect the flow factors, the technicals, to be more prevalent in the short term. And we should not forget that there's a lot of question marks over US exceptionalism, at least for the for the short term. And so with that, we've raised our Euro dollar forecast, over the next 12 months, from 107.50 to 115. So fairly significant, but the market has already moved there. I think we're probably a bit early on the lowering of the Treasury forecast, but that's in line with our view that we're going to see a slowdown in the US, maybe even a downturn, but not a recession.

So, with that, thank you Rob, and thank you Hani, for your insightful perspectives in a fast-changing market.

For further information, please visit pinebridge.com and until next time, thanks for listening.

ENDS