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Fixed income

Fixed income’s yield advantage

December 19, 2025 - 6 min
Peter W. Palfrey, CFA
Loomis, Sayles & Company

Where are you currently seeing opportunities?

On the fixed income market in general, I would say first off, you have a very substantial yield advantage relative to the more recent history, say the past five years. Number two, this has been a very favorable period to be in risk assets. So anything that generated an incremental yield relative to the treasury market also gave you the advantage of not only a better carry, but also the potential for price appreciation.

And in fact we've seen continued spread compression on investment grade credit, high yield credit, emerging market credit, on the securitized side, on agency MBS, and of course securitized credit. So the combination of having further spread compression, I would say, as well as that incremental carry that you're earning with all yields wrapped around say 4% right now, it's been a very favorable period and in fact we're approaching almost low end of double digit returns in some markets.

Even if you have a fairly sanguine outlook on the economy, we would argue, given where spreads are in most of the risk markets, we would favor being very liquid, very up in quality and price transparency and be poised to be able to redeploy if and when there's some kind of risk event, or vol event. And certainly with this administration that's going to continue to happen, we know that.

 

Do you think investors are overoptimistic about the health of US corporates?

I would argue that balance sheet quality, earnings, quality margins, top line revenue all looks pretty good. I mean, the corporate market is pretty healthy here. The economy has been quite robust in the post Fed tightening period. Tariff policy has been disruptive, but the global economy has been doing pretty well here and we've had more accommodation from global central banks as well. So that's also provided a good tailwind, I would argue to the global economy in terms of commerce and the ability for corporations to make money selling goods and services.

So despite the disruptions from tariff policy being uncertain and variable, and all the other adjectives you could throw on it corporate balance sheets look good. So it's not so much that I'd be concerned about their ability to continue to participate in in the current economy. It's more so valuations reflect all that and then some. And so I would argue that the credit market in whole is priced pretty close to perfection.

 

How did the US government shutdown affect the market's expectation of Fed rate cuts?

Powell likened it to, if you're entering a period of fog, you don't speed up, you actually slow down all actions. You want become more deliberate. And we think that that's where the Fed is now. And so the market went from fully pricing in another 25 basis point cut in December to today pricing in only about a 40% chance of a cut in December. So there has been a repricing. And so the net effect though is that we've pushed some of the cuts out further in the year. And so that's reflected in, in the terminal still being pretty close to that 100 basis points. But, but we've actually brought that in a bit, we're more like 80 now, but we've also lessened the probability of a cut in December, but also potentially in the January meeting. And so by pushing them out further, that actually puts a little bit of upward pressure on front end yields, and the long end is actually held in okay, because that on the margin is going to mean that the Fed is more restrictive for a little longer. And so I think the bond market, you know, seemed to be okay with that. But the net effect though is that, that there's uncertainty and so that gets reflected in risk.

 

What is the key risk to your base case?

Now the key things to watch I think going forward are going to be not only the growth data, and we're seeing really good earnings growth and other anecdotal evidence that the economy is still humming along pretty well, but it's going to really be on the labor market and we're starting to get some very high-profile job cut announcements. And what's been really interesting in this part of the cycle is that hiring has just basically ground down to a halt. So there's been very little hiring, but up until now you really haven't gotten the job cuts. And so that's allowed us to stay at kind of this nice little equilibrium with the unemployment rate, you know, wrapped around 4,3, right now. And that's pretty low by historic measure and reflects a very healthy market. However, with the size of the labor force actually going down year over year because of lack of immigration and some deportations, and fewer people coming into the market, in terms of new hires and so on. That just means that we're very tenuously balanced right now between very little hiring and very few firings. We are, however, seeing some, some pretty big companies that are now becoming more aware that they need to manage their cost structure.

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