Macro Talking Points
Credit as an attractive de-risking asset class. While there is no denying that equity market performance has been particularly strong over the past few weeks, two key phrases come to mind: risk management and diversification.
That is where credit comes into play. Adding further credit exposure to a multi-asset portfolio indeed encompasses many benefits, in our view. For a start, it could help manage total portfolio volatility, given that credit volatility is roughly half of that of equity vol. In addition, with the correlation between fixed income and equities correcting lower, the credentials of credit as a portfolio diversifier are improving. To be clear, the correlation coefficient between US IG credit and the US S&P is still positive, but it is the lowest it has been since 2020. F
inally, from an income generation standpoint, the yield on US credit is markedly higher than the S&P earning yields. Adding fixed income may sound like a contrarian view given the recent market developments, but we believe that diversification across asset classes is essential in order to help insulate portfolios from the possible market volatility shocks.
The appeal of asymmetry. The French neoclassical architects may have liked symmetry very much, but as an investor asymmetry tends to be more appealing. Why? Because asymmetry is usually associated with attractive risk/reward. This is precisely the situation we are currently facing around the pricing of Fed policy. The rates market is currently pricing in some Fed tightening over the next 12 months. Not a full rate hike, more like 60% of a 25bp move.1
However, we believe that the probability of a Fed rate hike over the next year is substantially lower than that of a rate cut. So here is the attractive asymmetry. Favoring a long duration bias in the US may make sense on this basis. Of course, there is also a curve positioning discussion to be had. The long end of the yield curve remains somewhat challenged by the adverse fiscal backdrop. Therefore, the bullish duration bias should probably apply to the front end or the belly of the curve.
Interestingly, the US CPI for April is going to be released this week and consensus estimates point to a sharp rise in headline inflation, mainly reflecting the impact of higher energy prices. You would think that this may seriously complicate the job of the Fed in terms of implementing future rate cuts. But we actually would not bet against that. When there is a will, there is a way, and the new Fed Chair may well still find a way to try to push for policy easing. Whether he manages to build an internal consensus for that is a different story.
[1] Source: Bloomberg. Fed pricing based on the forward cash curve. Data as of 8 May 2026.
