Investors Weigh Impact of War, US Inflation Accelerates By Most Since 2022 | Real Yield 4/10/2025
Speakers
Summary
- March headline CPI accelerated to 3.3% YoY, driven by a 21% MoM surge in gasoline prices due to the Middle East conflict; core CPI was more muted at 0.2% MoM.
- Consumer sentiment (University of Michigan) plummeted to its lowest level since the 1970s, signaling potential future belt-tightening as energy costs squeeze discretionary spending.
- The Fed is expected to look through the temporary energy shock, but re-acceleration in core services inflation (a "wage-driven battleground") would challenge Fed confidence.
- Fixed income yields are attractive (IG yields at ~85th percentile historically), providing income and downside protection, with strong demand evident in oversubscribed new issuance.
- Credit markets have been resilient with spreads largely unchanged post-inflation shock; the focus shifts to upcoming earnings to validate current tight spreads and 16% growth expectations.
- Private credit faces significant stress, particularly in software lending, with predictions of double-digit default rates for several years due to AI-driven obsolescence.
- Unlisted BDCs are seeing elevated redemption requests (net inflows turned negative for the first time), creating liquidity strain, but the impact on public credit is seen as limited and non-systemic.
- Structured credit, particularly single-asset, single-borrower CMBS, is showing widening and potential opportunity due to market dislocations.
- A "fragile equilibrium" exists in rates: the front-end is anchored by the Fed on hold, while the long-end faces structurally higher term premium and volatility, favoring a steepening bias.
- Portfolio positioning emphasizes selectivity, favoring high-quality, shorter-duration credit and being cautious on broad-based risk-taking given tight spreads and rising dispersion.
Trade Ideas
Alekseeva stated "duration right now is not the place," citing structurally higher term premium and market volatility driven by overlapping shocks. Persistent inflation shocks (e.g., oil) and a "structurally higher term premium" create a bias for curve steepening, making long-duration bonds vulnerable to price declines. Long-dated Treasuries carry unattractive risk/reward due to elevated volatility and sensitivity to inflation expectations, favoring other parts of the curve. A rapid de-escalation in geopolitics and a sharp drop in inflation expectations cause a rally in long-end bonds.
Alekseeva stated duration is "not the place," but "we still like the front end" as a better risk/reward, expecting more rate volatility and gradual curve steepening. The front-end is anchored by a Fed on hold, while term premium and inflation shocks drive volatility in the long-end. Higher money market assets ($8T) show strong demand for short-term yield. Front-end Treasuries offer attractive yield with less volatility and downside risk compared to long-duration assets in a "higher for longer" environment. The Fed surprises with rate cuts, diminishing the front-end's yield advantage.
Cecchini explicitly said, "We are seeing some widening in areas of structured credit that are very interesting," citing single-asset, single-borrower CMBS as presenting opportunities. Market chaos and dispersion are creating dislocations to intrinsic value. Structured credit continues to trade at a spread advantage to corporate high-yield. Current widening presents fertile, fundamental investment opportunities in structured credit, particularly in specific niches like single-borrower CMBS. A broader credit market downturn overwhelms the relative value advantage and leads to correlated spread widening.
Khoda stated, "We turned negative on the private credit space in September of last year," and expects multiple quarters of negative flows for unlisted BDCs. AI-driven obsolescence risk in software (a key lending sector), coupled with elevated redemption requests, creates a liquidity strain that could take several quarters to work through. The private credit space, particularly the unlisted BDC segment, faces cyclical headwinds and sentiment risk, making it unattractive despite not being a systemic threat. Software earnings dramatically outperform, AI disruption is overstated, and redemption pressures subside faster than expected.
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This Bloomberg Markets video, published April 10, 2026, features Yulia Alekseeva, Peter Cecchini, Neha Khoda discussing TLT, SHY, CRED, BIZD. 4 trade ideas extracted by AI with direction and confidence scoring.
Speakers: Yulia Alekseeva, Peter Cecchini, Neha Khoda · Tickers: TLT, SHY, CRED, BIZD