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The fear of the Fed macro regime is back, but for how long?
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Which are the defensive assets of global fixed income?
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The compounding of uncertainty and what it means for equity portfolio construction
Back to the fear of the Fed macro regime, at least temporarily, but what is next?
It has been a tough time for duration over the past few weeks. It has also been rough for risky assets, including credit.
All in all, the trademarks of the fear of the Fed regime, which haunted global investors back in 2022. It is labeled the “fear of the Fed” as it reflects the perception that central banks will have to raise their policy rates – or at least not cut them anymore – typically as a response to an inflation shock. As a result, market rates go up and the threat of tougher central banks also spook the appetite for risky assets, including credit and equities.
The 2022 playbook has taught us that under that regime, outperforming assets tend to be cash and short-duration fixed income indices.
There is a major difference between 2022 and now, however. The current trigger of this macro regime shift has obviously been the geopolitical crisis, for which there is still little visibility about the outlook. Unlike 2022, when the inflation shock was caused by a global economy having run into overheating mode post-Covid, this time around, it is still way too early to call that we are facing a quasi-permanent inflation shock. On this basis, the risk of near-term macro regime shift remains elevated. Looking ahead, there are other possible macro regime scenarios.
The first one may surface if the war ends soon. The inflation shock would be treated as only temporary and there would be an assumption that the growth backdrop has not been fundamentally dented. In other words, we would go back to the recovery regime, which is supportive of risky assets but not positive for government bonds, as central banks would not necessarily have a compelling case for switching to policy easing mode.
The other macro regime scenario may manifest itself if the geopolitical crisis lasts long enough for the market focus to shift away from inflation to the threat of a serious growth shock. Under that scenario, we would probably experience Goldilocks again, with central banks easing, and risky assets being well supported by the expectation of an improved growth outlook.
Finally in an extreme scenario, recession fears could resurface, especially if investors lose confidence in the ability of central banks to address the growth shock. For now, we may be stuck in this fear of the Fed regime, which is by far the most toxic one, but the real question is: for how much longer?
Which are the defensive assets in global fixed income these days?
The short answer is almost none of them, since the prevailing macro regime – as discussed just above – has been the dreaded fear of the Fed, the worst possible outcome for global fixed income. With that in mind, determining asset class defensiveness is a matter of definition and perspective. Of course, the most straightforward way to assess the defensive characteristics of an asset class is to look at its performance since the onset of the conflict.
Everything has been in the red over the past month, with the notable exception of US leveraged loans, whose index has been up by about 0.50%.1 Beyond that, the most resilient asset classes have been US tips and US high yield, followed by EM corp debt, all registering only small losses.
Looking ahead, it may be useful to look at break-even yields, a measure of how much cushion an asset class has before a rise in yield wipes out any positive total return over the next year. On that score, EUR HY, US HY, EM Corp and EUR IG appear to provide the largest cushion, helped by their shorter duration. In contrast, the longer duration indices such as taxable munis, US IG or EMD have less room for absorbing a yield shock.
Finally, we also find that yield volatility may be a useful indicator to consider, especially in relation to the actual level of yields. On that front, the bunds have performed quite poorly as a defensive asset, exhibiting the highest yield volatility in the global fixed income universe. Not a total surprise, given how duration in Europe has been challenged. Yield volatility has also been severe for munis, USTs, and the EUR Agg.
When looking at the ratio of yield per unit of yield volatility, it is worth highlighting that EM debt – both in hard currency and in local currency – are producing the most attractive results across our broad asset class sample, mainly owing to yield volatility that tends to be lower in EM than in DM these days. Likewise, global HY and US HY are also particularly interesting from the standpoint of risk-adjusted yields, especially as duration has been the main driver of higher yield volatility. Overall, there has been no place to hide, but we feel that some of the recent market moves may now be in overstretched territory.
The compounding of uncertainty and what it means for equity portfolio construction.
Markets today are not grappling with a clear next step, but with an unusually wide range of possible scenarios.
In environments like this, time, not prediction, becomes the critical variable shaping portfolio outcomes.
As uncertainty persists, risks tend to compound rather than resolve, increasing the importance of how portfolios are constructed rather than what any single forecast implies. Over time, second‑order effects, such as inventory adjustment, supply constraints and policy responses, begin to matter more for earnings and cash‑flow resilience than headline price moves. In other words, uncertainty compounds. That is why the range of possible macro and market outcomes remains unusually wide, and why conviction needs to be held more loosely than usual.
Importantly, this uncertainty is arriving after a period in which markets were supported by several favorable tailwinds, easing inflation, expectations of lower rates, ample liquidity, ongoing consumer dissaving, and strong enthusiasm around AI‑related investment. As those supports are now being tested, outcomes become more path‑dependent. The risk is not a single shock, but the gradual unwinding of assumptions if uncertainty persists. Near‑term price action has been driven by volatility in energy, rates, and policy expectations rather than fundamentals. But earnings ultimately matter. Supply‑side pressures, particularly in energy, food and other essential inputs affected by disruption, are likely to create meaningful dispersion even within traditionally defensive or high‑quality segments of the market. The longer uncertainty persists, the more pressure builds on margins, financing conditions, and demand resilience.
This increases the case for selective, valuation sensitive, bottom‑up exposure to companies with strong balance sheets, pricing power, and durable cash flows, rather than broad‑based quality or defensive allocations.
Remembering in this environment, not all “quality” may behave defensively where margins are highly exposed to input‑cost shocks or demand fragility. Markets remain somewhat binary.
A swift de‑escalation would likely allow risk assets to look through near‑term disruption and recover quickly. A longer‑lasting shock, however, shifts the distribution toward slower growth and stickier inflation, a far less forgiving backdrop for weaker balance sheets and valuation‑dependent growth. A useful reminder of how quickly narratives can evolve comes from AI.
AI remains a powerful long‑term driver, but recent shifts in perceived beneficiaries highlight how rapidly economics, leadership and expectations can change – even within high‑quality growth areas. For example, following the publication of Google’s TurboQuant memory‑compression algorithm, market reactions underscored how quickly assumed profit pools and competitive advantages can shift in emerging technologies. The lesson is about how dispersion can emerge suddenly as underlying economics evolve. This is an environment where outcomes matter more than forecasts.
In our view, portfolio construction should prioritize resilience over precision, recognizing that dispersion is likely to rise across and within sectors, styles and factors. Staying invested matters, but knowing what you own, and why, matters even more (Contribution from Ross Cartwright, Lead Strategist – Strategy and Insights Group).
[1] Sources: Bloomberg, Morningstar. Morningstar LSTA US Leveraged Loan total return. Performance month-to-date up to 27 March. Returns are gross and in USD.
