Bond Traders Weigh Rate Hikes, MTA Threatens to Sue US | Real Yield 3/20/2025

Summary

• Market has dramatically repriced Fed expectations due to the Iran war, shifting from pricing two 2025 rate cuts to pricing nearly a 50% chance of a hike by December 2025. The 2-year Treasury yield has moved above the Fed Funds rate.
• Kathy Jones views this repricing as appropriate given the war's escalation and duration, leading to an energy price shock and an inflation hit, though she is unsure the Fed will actually hike.
• George Bory believes the front-end move is an overshoot; the Fed is "on hold" and "stuck in neutral." He notes long-term inflation expectations remain anchored near 2.4%.
• Speakers see value emerging in the short-to-intermediate part of the Treasury curve (2-5 years) as it prices in hikes, advocating to "grab the yield, play the carry."
• Stagflation risks have increased, but the starting yield level provides a cushion for bond investors. Investment-grade, securitized, and municipal bond markets are seen as being in "pretty good shape."
• Morgan Stanley report highlights a potential 8% default rate in private credit, concentrated in software names, which comprise ~25% of the asset class. This is compared to COVID-era levels.
• New issue concessions in investment-grade have more than doubled in March, driven partly by heavy supply from technology/hyperscaler capital expenditure funding needs ($750B estimated for 2025).
• Credit spreads have widened (IG from 70 to 90 bps) but remain historically tight. Meghan Robson notes investors are underweight credit, providing potential support.
• Zachary Griffiths advocates moving up in quality given uncertainty and sees the recent selloff as a potential entry point, but cautions that heavy tech supply is a technical overhang.
• U.S. investment-grade credit is seen as a relative haven compared to Europe due to the U.S. being a net energy exporter and having less energy-intensive sectors.