The US Federal Reserve held rates steady overnight for a fifth-straight time. The next meeting of Federal Reserve officials now won’t take place until September in Jackson Hole, where they will have two months of data to analyse.
Haran Karunakaran, Fixed Income Investment Director at Capital Group commented on the decision.
“Although the Federal Reserve decided to keep rates steady at its recent rate setting decision, the chance of rate cuts at upcoming meetings remain live as they balance softening economic data with the potential for persistent inflation. A supportive monetary policy cycle should continue to support higher-quality credit allocations,” Karunakaran said.
“Aside from a short lived sell off in April post liberation day, credit valuations have remained resilient, supported by powerful technical forces. Elevated liquidity, significant cash on the sidelines and ongoing policy support continue to compress risk premia and dampen volatility. These dynamics can keep spreads still relatively tight despite economic uncertainty. In this environment, thoughtful positioning is essential. Focusing on higher-quality credit can help protect portfolios while still delivering income. With markets prone to sudden shifts, selectivity and flexibility are key. One important takeaway from recent volatility is the value of maintaining a solid defensive allocation to help smooth returns. We believe higher-quality credit is well placed to deliver.
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“Underpinning inherent credit strength is corporate fundamentals and a resilient consumer which remain robust despite trade-related uncertainty. In Investment Grade Corporates, credit metrics are particularly strong by historical standards, with opportunities emerging in areas such as European banks, US electric utilities, and pharmaceuticals. These bonds also provide a source of duration, which can help in case of a continued slowdown of the economic growth. Against a backdrop of solid corporate health and a resilient consumer, we believe higher-quality credit can continue to provide the defensive ballast portfolios need.”
