Navigating fixed income through Fed policy shifts

The report from Franklin Templeton Institute’s US Fixed Income Navigator highlights a favorable outlook for bonds in Q4 2024, with historically attractive yields, particularly in real terms, as inflation expectations stabilize around 2%. Easing inflation and slowing global economic growth, evidenced by falling commodity prices, have led markets to anticipate the Fed's recent rate cut, resulting in a bull steepening of the yield curve, which benefits high-quality bonds.

However, short-term risks include much of the positive news already being priced in, requiring significant surprises to outperform. Longer-term risks include geopolitical tensions and rising fiscal deficits, which may push up premiums on US government bonds.

The report also reviews lessons from past rate-cutting cycles that remain relevant for managing fixed income portfolios today.