Fixed Income Securities

Tight as a Drum (+76 bps) Investment Grade Corporate Credit Spreads trade at the 0 percentile, a spread of +76 bps vs. UST, the tightest spread since 1997 (see table below). A-rated bonds trade at +62 bps, while BBBs are +96bps. Reasons why spreads are so tight: - Credit risk and balance sheets has improved for IG issuers - Credit conditions in the financial markets are at its easiest level since pre-COVID - The Fed will soon embark upon an easing cycle - Corporate earnings are strengthening - The risk of recession is low - Investor Demand is robust (higher UST yields allows the absolute yield level to remain ~50%, despite tight spreads) These strong fundamentals paint a supportive picture for IG credit; however, historically tight spreads suggest that much of the positive outlook is already reflected in current pricing. Investors should remain disciplined and selective, with no reason to sell IG at the current juncture as our favorable credit conditions should remain intact. Since diversification and intelligent asset allocation decisions remains paramount to long-term wealth creation, capital allocators can identify compelling non-IG and Private Credit that will continue to offer higher IRR/MOIC profiles as yield premiums for higher yielding assets should continue to meaningfully enhance portfolio income, just as it has over the years.

The bond market is on fire - let's unpack what's going on. Slowly but surely, bond yields are making new highs: 30-year Treasuries have now breached 4.80% and the record highs of October 2023 don't seem that far anymore. But as always in bond markets, the devil is in the details. Here are 3 important nuances to consider: 1️⃣ The curve has been bear steepening Since early December, yields are up across the curve but the long-end has been selling off even harder than the short-end - that's known as a bear steepening of the yield curve. Bond investors are pricing an environment in which a very hawkish Fed won't affect the economy down the road. 2️⃣ The ''new normal'' priced in is Fed Funds at 4%, not 2% anymore The chart below shows the nominal equilibrium rate priced by markets. That's the rate at which the economy doesn't overheat or excessively cool down. Notice how this rate used to be priced around 2% before the pandemic. Today, it sits at almost 4%. Markets are pricing the US economy to be able to handle 4% rates as the ''new equilibrium''. 3️⃣ Term Premium is on the rise Term Premium is the compensation investors require to warehouse duration risk in long-end bonds: the more volatile the expected macro environment, the higher the term premium. In short, the bond market is saying: - We have a ''new normal'' in Fed Funds: 4% is fine, the US economy can handle it - On top, we inject some term premium in the long-end: procyclical fiscal and tariffs bring uncertainty 🟥 Do you think the US economy and the housing market can handle this ''new normal'' for interest rates? 👉 I'll publish a deep macro piece on the topic soon. Get it in your inbox alongside 152,000 investors. For FREE 👇 https://lnkd.in/dmGB33_F

The Australian Financial Review had an article yesterday that unfortunately had faulty logic with respect to mortgage rates and the spike in 30 year yields. The article noted that 30-year Treasuries had spiked (this is true and an increasingly global phenomenon). However the article then noted that: "US mortgage rates are set at a fixed rate over 30 years, and so the prevailing 30-year bond rate is used to set the borrowing cost for home buyers" This is incorrect. Firstly the conventional wisdom in markets is that it is the 10-year Treasury that is actually the benchmark rate for mortgage backed securities (MBS) not the 30-year. This is one of those idiosyncrasies of capital markets where something seems like it should be obviously true, but it just ain't so. This is one of the reasons why the 10-year Treasury yield has been the focus of the Trump administration in discussions and caused such consternation in the administration's about face on the trade war. The reason is that the duration of a MBS is actually much shorter than 30-years, as noted by Hancock & Passmore (2014) in their Fed paper: "When purchasing Treasury securities, the Federal Reserve was quite aware of the duration effect and specifically targeted its purchases of Treasury securities toward those with a maturity of 4 to 7 years, so that it would withdraw more duration from the market.8 MBS typically have a duration that is in the 4 to 7 year range." So how come an asset (Mortgage Backed Securities) where the individual components have a sticker duration of 30-years suddenly has a duration of 4-7 years? Because that's roughly how long people on average take to refinance their mortgage in America, or just move homes. Just because people have a 30-year mortgage doesn't mean that they hold onto that exact mortgage for 30 years. Certainly true that some folks in Covid lucked out in a big way. But more typically the American experience with a 30-year mortgage has not looked that different from the Australian one, just with more frictions and stickiness for refinancing. So yes, I don't like to be so pedantic, but the logic was more or less the entire article so I have to call it out. #AFR #30yearrates #Mortgages

Corporate bonds now yield only 0.12% above the Fed Funds rate.   The lowest level since 2007, preceding the Global Financial Crisis. 
Every time credit spreads were at historically suppressed levels, a hard-landing scenario followed.  

Perhaps this time is indeed different, but I would rather base my perspective on numerous indicators pointing towards an impending severe recession.

The profound issue of yield curve inversions is yet another example.

Recently, over 90% of the Treasury curve was inverted, a measure that has accurately predicted every major economic contraction in the last 50 years. 
Moreover, the Fed’s policy stance should also be taken into consideration. 
 As we have learned repeatedly throughout history, tightening monetary policies work with a lag and we are yet to witness a significant credit contraction that could lead to further economic issues. 
Even the apparent strength of the labor market should be taken with a grain of caution.
 Historically low unemployment rates have served as one of the most reliable contrarian indicators in history.   Either these macro indicators are on the brink of being proven wrong, or the overall equity valuations are entirely out of line.

From Subprimes to Treasuries: The New Fragility of the Banking System In 2025, banks are no longer threatened by toxic assets but by “safe” bonds that have become a silent systemic threat. Back in 2008, unrealized losses on US bank balance sheets were estimated at around 150 billion dollars. In 2025, the figure exceeds 700 billion dollars, reaching a historic and deeply troubling threshold. A Shift in the Nature of Risk In 2008, losses were linked to fundamentally flawed instruments such as subprime loans and opaque structured products with compromised credit quality. In 2025, the losses stem from instruments once considered risk-free: US Treasuries and agency-backed mortgage-backed securities. The difference lies in the macro environment. The rapid and aggressive rise in interest rates has mechanically crushed the value of long-duration bonds, transforming the safest holdings into a latent threat. This sharp tightening cycle stems from a major policy error. Under its post-pandemic framework, the Fed tolerated inflation above 2 percent, expecting it to be temporary. As prices surged in 2021, it kept rates near zero and maintained bond purchases. When inflation proved persistent, the Fed was forced into the most aggressive tightening in 40 years, a delayed shock that crushed the value of fixed-income holdings across the banking system. Accounting Illusions and Hidden Risk Regulatory accounting adds another layer of opacity. Available for sale AFS portfolios are marked to market, so losses appear on financial statements. Held to maturity HTM portfolios are recorded at amortized cost, keeping losses hidden unless securities are sold. The FDIC removes this illusion. It publishes all securities at market value, regardless of classification, exposing the true extent of the losses. The Systemic Risk: Unrealized Today, Real Tomorrow As long as bonds are held, the losses remain unrealized. But when liquidity pressure arises, as the collapse of Silicon Valley Bank showed, forced sales instantly crystallize those losses, eroding capital and shaking confidence. This is the new fragility of the banking system. It is no longer based on credit risk but on interest rate and duration risk. Hidden in plain sight. Ready to detonate under stress. Note: In 2024, US commercial banks generated 268 billion dollars in net profit. Unrealized losses on bond portfolios represent nearly three years’ worth of profits.

The bond market just hit an unexpected roadblock. Shapoorji Pallonji Group is seeking a two-month extension on Rs 14,300 crore of bonds due end-April. Not because investors are not showing up but because pricing the deal has suddenly become expensive. What changed? Recent moves by the Reserve Bank of India to tighten access to the offshore FX (NDF) market. -Hedging costs have jumped from ~2.5–3% to over 5% - Offshore liquidity has tightened sharply - Bond yields have climbed toward ~18% #privatecredit #highyield #spgroup

The last time the bond market was this quiet, I was sitting on a trading desk in Boston. It was 2007. Spreads were tight. Vol was low. Everyone was calling it a soft landing. Six months later my phone rang at 4am. So when I look at today's market and see the same calm, I understand why advisors feel uneasy. But here's the thing: I did the homework. And this time really is different. In 2007, the calm was a lie. Built on subprime fraud and ratings agencies rubber-stamping garbage. In 2026, the calm is earned. Fed easing. Clean balance sheets. Default rates negligible. Three numbers that tell the story: MOVE Index at 63 (down 55% from 140) IG spreads at 75 bps (tighter than 98% of last 20 years) IG corporates still yielding near 5% Low risk + high yield + stable market = the rarest combination in fixed income. I wrote the whole case in this week's Weekly Clarity Brief. Including: Why 2007 and 2026 look the same on the surface but are structurally different underneath The spread objection (and why it's wrong right now) Exact client conversation language you can use this week The three traps that keep advisors from acting during windows like this

Most people think mortgage rates move in line with the Fed, but that’s only half the story.   When the Fed cuts rates, mortgage rates can come down over time, but not right away. The real driver is the 10-Year Treasury yield. If you compare 30-year mortgage rates with the 10-Year Treasury over the last few decades, they’ve tracked almost identically. That’s because investors who buy mortgage-backed securities use the 10-Year Treasury as a benchmark for safe, long-term returns.   Historically, mortgage rates sit about 1.75% higher than the 10-Year Treasury. In recent years, that gap (called the spread) has widened to 2–2.25% because of inflation and market volatility. As inflation cools and stability returns, that spread should narrow again. Combine that with expected Fed rate cuts, and we could see mortgage rates in the mid-5s in the months ahead.   The takeaway is simple: don’t focus on headlines, focus on data. Understanding what actually moves rates helps smart buyers and agents make confident, strategic moves while others wait.

The most striking development in markets recently has been the rise in bond yields. Over the past year, 10-year yields in the US, UK, France, and Japan have climbed 60 to 120 basis points from their lows. What makes this particularly notable is that, aside from Japan, this has happened even as central banks have been cutting short-term policy rates. Bond yields can rise for various reasons. When central banks raise rates, as the Bank of Japan has, longer-term yields tend to rise in anticipation of higher short-term rates in the future. Yields can also rise with stronger economic growth, as markets expect central banks to tighten policy over time. Inflation expectations are another factor: when bond investors foresee higher inflation, they demand higher yields to compensate for the erosion of purchasing power. Indeed, rising inflation expectations explain part of the recent movement. However, the majority of the rise in yields is due to country-specific factors. In the UK, concerns about the sustainability of fiscal policy — amid weaker growth and persistent inflation — have pushed yields above levels seen during the “Truss moment” of September 2022. In France, political instability and challenges in passing a fiscally responsible budget have caused French bond yields to climb above even those of Spain. In the US, the rise in long-term yields has been driven by an increase in the term premium — the additional compensation investors require for holding longer-term bonds, reflecting greater uncertainty over time. Risks like inflation, interest rates, and liquidity are harder to predict over ten years than two, which increases this premium. Estimates suggest the term premium accounts for half to three-quarters of the recent increase in US long-term yields. This points to growing uncertainty about the longer-term economic outlook. In the US, questions loom over fiscal and trade policies, future inflation, and how much additional borrowing will be required to fund government spending. These uncertainties weigh on investor confidence and push yields higher. For now, bond yields haven’t risen to recent-year highs or in a disorderly manner, and they’ve even eased slightly with softer inflation data in the past week. Still, higher yields are beginning to pressure equity returns, much like they did in 2022, as higher rates reduce the present value of future cashflows. On the flip side, they also provide a stronger cushion if the economy or inflation slows more quickly than expected. All in all, an interesting start to the year.