US monetary policy: between neutrality and rate cuts
Flavio Carpenzano explains that the Federal Reserve’s current rate-cutting cycle may be less aggressive than initially anticipated. Analytical tools suggest monetary policy is nearing neutrality, a mid-cycle characteristic. This scenario indicates further rate cuts, though on a smaller scale than projected in September.
Key drivers of US economic resilience
Carpenzano attributes the resilience of the US economy to both structural and cyclical factors:
- High productivity: Rising to 2.5% annually since 2023, it helps keep labor costs low and margins high.
- Government and private investments: Infrastructure and tech megaprojects, including GenAI, fuel growth, with private demand being the main driver of real GDP.
- Consumer spending: A central pillar of economic strength.
Public debt: sustainability in question
With public debt exceeding 110% of GDP, concerns about sustainability persist. However, Carpenzano emphasizes that projections can vary significantly depending on inflation, productivity, and nominal yields, with minor changes in these parameters altering outcomes substantially.
Opportunities for bond investors
Carpenzano outlines the following strategies for bond investors:
- Steepeners: A solid hedge against downside risks unless inflation accelerates significantly.
- Duration: Despite regaining value, the risk/reward profile still favors steepeners.
- Investment-grade corporate bonds: The pharmaceutical sector offers value due to its defensive nature and attractive spreads.
Emerging markets: opportunities to seize
Emerging market debt, particularly in local currencies, presents a positive carry, with more value in high-yield bonds in lower-quality segments.
Final thoughts
Flavio Carpenzano asserts that the resilience of the US economy creates a stable environment for bond investors, with opportunities in both developed and emerging markets. Careful risk assessment and macroeconomic analysis remain crucial to optimizing portfolio performance.
What’s your take on Carpenzano’s insights? Share your thoughts in the form below!
