Watch as Harry Hardy, Investment Director for the Fidelity Global Bond Fund shares candid insights on labour‑market fragility, inflation trends, and shifting US Fed dynamics, explaining why the team is leaning into duration and staying disciplined on credit as spreads sit near multi‑decade tights.
Key takeaways
- We have high conviction in U.S. Treasuries, supported by weakening labour indicators and continued evidence of disinflation across core components.
- We expect US Federal Reserve rate cuts in the first half of 2026, with scope for deeper easing if the economic slowdown intensifies.
- Credit spreads remain historically tight, offering limited value. The Fund is positioned underweight credit and prepared for potential spread widening.
- The Fund remains defensively positioned, with a focus on long duration and reduced credit exposure given signs of underlying economic softness.
If we think about bond markets over the last 12 months and beyond, there's been a lot happening. There's been anticipation of U.S. rate cuts, inflation has been sticky then not sticky, then there's a prospect of potentially a new US Fed Chair coming in later this year. How are we navigating this environment?
We're remaining very defensively positioned currently. You're 100% right, there has been a lot going on for the last 12 months. Currently, we're positioned with a long duration bias, predominantly in the U.S. and to a certain extent in the Eurozone as well, which we'll touch on and also quite light on credit risk.
Our key view is that there's quite a lot of complacency in the market currently and we have that in risk assets both in an equity and a credit context. When you start to dig a little bit deeper, there's quite a lot of weakness out there.
For instance, if we look at the U.S. labour market, much has been made the last 12 months or so of the actual strength in some of those numbers but that's not necessarily the case. 97% of private job creation in the U.S. has come from the healthcare and social assistance sector. But if you look at technology, financial services, construction, and retail, they're almost flat or declining. We believe that there's quite a lot of weakness beneath the hood and are trying to remain disciplined and focused on that approach.
I think the announcement, of the new incoming Fed governor (I know that's going to be a couple of months away) is going to be particularly topical and obviously much was made of the U.S. President looking for a more dovish leaning candidate, when actually, that was one of the most hawkish candidates. I think that's interesting. We'd also remind clients that there is a process that the Fed goes through.
I think really what's going to be key is how the communication of the US Federal Reserve evolves. In the past, we used to have quarterly press announcements but now we're at a point where it's after every meeting. Walsh has been rather critical in the past of the dot plots and the signalling to the markets of the trajectory of interest rates. I think that has the potential really to lead to a little bit more volatility in the market and really build the case for active management in a fixed income context.
From a portfolio perspective, we have been long U.S. treasuries. There has been a lot of discussion amongst clients and investors around allocating to U.S. treasuries. There are different views out there. Being long U.S. treasuries, what's our key rationale for that positioning in this market environment?
It's really that weakness in the labour market. Obviously, as you know, the Federal Reserve has a dual mandate of price stability, maximum employment and once again, leaning back into that point I made a few moments ago, that structural weakness that we're seeing in those cracks beneath the surface in the U.S. labour market, that is one of the centre views and a support of that position.
I think there's been challenge in the last year, especially with some of the announcements around tariffs and the noise that has created. Certain institutional investors in Japan or China are reducing their holdings in U.S. treasuries. We would challenge that notion. That's a trend that's been happening over the last 15 years or so. We're comfortable with U.S. treasuries from that perspective.
We're comfortable with the trajectory of inflation as well. We believe that inflation's going to continue on a downward trajectory at the tariffs and how that would feed into the inflation numbers, largely that's been more contained than many expected.
Another important factor behind inflation is what we call owners' equivalent rent i.e. the cost it would cost one to rent their home that they're living in and that's a big component of core inflation. A lot of the leading indicators that we see are pointing towards a downward trajectory there as well.
We also have some support from oil prices. I know they're volatile as well but for the most part, we're comfortable with them.
Thinking about rate cuts, there's been much anticipation particularly in the U.S. around what the Fed is going to do, will they cut, won't they cut? If so, how many cuts? What's your view?
They're definitely going to cut; it's the magnitude of how much they're going to cut. Currently in the market, we're pricing around two rate cuts for this year. Our base case scenario is for around three cuts. It’s probably going to be a couple of months, we don't see them cutting at the next meeting, and probably the earliest would be in June.
Some of the challenge in the short term would be that we have some physical pass through in some of the measures that are coming in from a tax rebate perspective so that's going to distort some of the numbers. Whilst that's our base case, something that we really feel that the market under appreciates is the transmission mechanism in the U.S. monetary policy system and how that's lengthened in recent years. What I mean by that is if we do have a material slowdown in growth or even a recession, the magnitude that the Fed is going to have to cut is far, far more than many anticipate.
Many households during the COVID pandemic refinanced their rates, so around 75% of households have a mortgage at around five percent. But if you look at current market pricing of six and a half, low sixes, nothing the Fed has done has really supported the economy from a household perspective. So once again, if we do have that slowdown, it's going to have to be much more to follow.
I know we've been cautious on credit. Credit spreads have remained relatively tight. What are we seeing in the corporate sector at the moment?
I think that's a great point and it's interesting because in your opening remarks, you made the point of the Strategy being launched over 30 years ago. Where we are with U.S. I.G. credit spreads currently is they're at their tightest levels that they've been since 1987. Last time I was here last year, that was 1998, we were quoting that number.
I think that really shows that credit spreads are pricing absolute perfection. When you couple that with the unknowns ahead, the cracks in the labour market, some of the concerns that we really have, we're struggling to reconcile those valuations against that landscape.
So, currently we're positioned rather defensively, we're running a credit beat of around 0.5 times the benchmark. What that means is that we're positioned for that credit spread widening event and that would be a positive driver of relative returns and leave us well paced to top credit up at that juncture.
What we would say is we don't have a deep concern for the most part from a fundamental perspective and the challenge to that view would be technical factors remain strong and that indiscriminate buyer from an all-in yield perspective remains. But, once again, we don't see credit spreads at that level offering much value.
Interestingly, if you look over a 12-month time horizon where credit spreads are at this level, it's quite challenging to see a scenario where they can deliver positive excess returns relative to treasury. That really feeds through into that defensive stance we have. A bit longer in duration and really underweight credit risk within the Fund.
