Monthly fixed-income focus

Bonds can continue to perform well even with the Fed on hold

What you need to know

• Solid fixed-income performance could continue as yields appear poised to remain range-bound, especially if the economy cools further.
• The Federal Reserve remains in its rate-cutting cycle, though the pace has slowed.
• Emerging-market debt could outperform U.S. high-yield bonds in this environment because of its higher credit quality and longer duration.

Portfolio tip

Bonds can help protect against a further slowdown in the economy as lower yields could drive bond prices higher. Consider raising allocations to emerging-market debt, if appropriate, with U.S. high-yield bonds as a potential source of funds.

Bonds can help protect against slowing growth

A slowing economy can reduce demand for credit and loans, which, combined with Fed interest rate cuts, could drive yields lower. Bond prices — which move inversely to interest rates — could benefit. Continued solid fixed-income performance can help support diversified portfolios.

Fed likely to stay on the sidelines for a while longer

The Fed has been on hold this year as it takes a more patient approach amid slowing disinflation and policy uncertainty. The Federal Open Market Committee (FOMC) released its updated economic projections in March, maintaining the fed funds rate “dot plot” at two rate cuts each for 2025 and 2026. The committee also cut its growth outlook and raised its forecast for Personal Consumption Expenditure (PCE) inflation.¹ The Fed slowed its balance-sheet reduction, known as quantitative tightening. This can ease monetary policy as the Fed will participate more actively in U.S. Treasury auctions, supporting bond prices and helping to contain yields to the upside. A resilient labor market and elevated inflation should allow the Fed to remain on hold as it awaits clarity on tariffs, potentially resuming rate cuts in June or July.

We favor emerging-market debt over U.S. high-yield bonds

Emerging-market debt appears attractive when compared to U.S. high-yield bonds, given its higher credit quality and interest rate sensitivity.² Most emerging-market debt is investment-grade quality, which could make these bonds more resilient if the economy slows. U.S. high-yield credit spreads — which reflect the excess yield above U.S. Treasury bonds to compensate for default risk — are well below their historical average.² Any further slowing in the economy could drive credit spreads wider and bond prices lower. Emerging-market debt also tends to have longer duration, which means it’s more sensitive to interest rates. It could benefit more from lower yields as major central banks likely continue easing monetary policy.