Rates never sleep

The bond market has shown resilience despite recent volatility, delivering impressive returns in the third quarter of 2024, largely due to the Federal Reserve's significant rate cut. Federated Hermes attributes its strong performance to a diversified investment approach and strategic positioning by its committees, particularly in navigating the yield curve and duration adjustments.

The normalization of interest rates across developed markets, excluding Japan, has created opportunities amidst speculative Fed easing and economic data fluctuations, allowing for profitable duration management and steepener trades. Within multi-sector strategies, overweights in emerging market debt and mortgage-backed securities have yielded positive results, emphasizing the value of low-correlation sectors.

Despite defensive credit positioning initially detracting from performance, the tight spread markets have validated this cautious approach. As risk assets enjoy favorable conditions, the yield curve is expected to continue steepening, influenced by Fed policy and economic strength or weakness.

The upcoming US election introduces uncertainty, impacting economic policy and potential investment opportunities in currency markets. Patience is advised in duration positioning, given the unpredictable nature of such binary events, while tactical currency strategies may benefit from dollar fluctuations.