Volatility, velocity and vigilantes

The investment landscape in 2024 has been characterized by significant volatility, with markets reacting to political and economic uncertainties. The Bloomberg US Aggregate showed modest gains for the year, despite a turbulent Q4 influenced by investor expectations of a Trump election win, which led to higher rates and tighter spreads. This mirrored the market dynamics observed in 2016, with a notable steepening of the yield curve and a rise in the 10-year Treasury yield.

Federated Hermes' fixed income strategies performed competitively, leveraging a diversified alpha process. Their strategic focus on the yield curve and tactical duration adjustments proved profitable, despite challenges in corporate investment grade and high-yield spreads, which remained tight. Overweights in Mortgage-Backed Securities (MBS) and emerging market debt helped offset underperformance in other areas.

Looking forward, the Federal Open Market Committee's (FOMC) reduction in rate cut expectations suggests a period where coupon rates could drive bond returns, reminiscent of past cycles where rate cuts were paused and reversed. This environment could lead to reasonable bond returns, albeit with a bear steepener as the yield curve normalizes.

The economic landscape is complex, with stronger-than-expected growth fueling inflation concerns amidst political and policy uncertainties. The potential for protectionist policies to boost inflation, coupled with deregulation and energy policies providing positive effects, presents a mixed outlook. The Fed's response to the new administration's policies will be critical, as sequencing of policy changes could significantly impact economic conditions.

Finally, the notion of a "Trump put" suggests potential for both stock and bond markets to rise, though recent price actions indicate challenges. Investors must remain vigilant, as the familiar playbook may not yield the same results, adding to the mix of uncertainties that could disrupt markets.