Perspectives Financial Markets provides comprehensive coverage of the latest financial market developments, offering in-depth analysis of global trends and market developments.
More rate cuts by the Fed and a soft landing are priced in
Following the first 50 bps cut by the Fed in September, the futures market currently prices in seven further cuts by the end of June 2025 and one more cut by the end of June 2026. We currently expect one rate cut less than the market. Markets also seem to expect some sort of “soft landing” of the US economy, i.e. moderate real GDP growth and inflation and only a moderate uptick in the unemployment rate (see chart above). These expectations are relatively close to our own base case, which we call “monetary policy goes neutral as inflation and growth reach equilibrium”. We think that the market pricing of this scenario is one of the reasons for the low credit spread levels currently. Spreads discount the consensus scenario of declining rates and a period of weaker macroeconomic indicators, before lower rates unfold their stimulus for the US economy. This scenario is positive for credits as (1) fixed-coupon bond prices and long-duration credit positions can profit from a decline in rates, (2) companies and consumers (who have a high share of variable debt) pay lower interest expenses and (3) lower rates over time stimulate economic growth. For October, we have a neutral view on high-yield (HY) and investment-grade (IG) credit spreads. Regarding duration, we expect lower yields in the US and Germany into year-end and have a neutral view regarding Swiss bond yields.
