2. Economic data: A solid labor market with low unemployment continues to support growth, fueled by resilient consumer spending. Anxiety about potential tariffs, however, weighed on business and consumer sentiment last month (FIGURE 1). The “animal spirts” of the beginning of the year have started to abate as investors are faced with a deluge of concerning developments around global trade, federal outlays, and the federal workforce. There's a risk that policy uncertainty will quickly feed through to actual weak growth, highlighted by the most recent GDPNow forecast from the Federal Reserve Bank of Atlanta (FIGURE 2), which declined sharply on rising imports.¹  

3. End of quantitative tightening (QT): Minutes from the January Federal Open Market Committee (FOMC) meeting revealed that some members considered it appropriate to pause or slow balance-sheet runoff due to potential reserve volatility from debt-ceiling dynamics. Liquidity conditions may likely get a boost once the Fed pauses QT and potentially takes some pressure off longer-term US Treasury yields. The Fed also opened the door to changing the composition of Treasury-securities purchases to align with the maturity composition of the outstanding stock of Treasury debt. There was also a discussion of the Fed's policy-framework review, which indicated the Fed won’t reconsider its 2% inflation target but will review the approach to monetary policy and communication practices. The FOMC believes policy is still restrictive and is taking time to assess the economic outlook. Markets are now pricing in approximately 80 basis points of rate cuts by the end of this year.

4. Russia/Ukraine conflict: Ukrainian President Zelensky met with President Trump in Washington DC, where he was expected to strike a deal agreeing to share mineral resources in exchange for security guarantees. Instead, the meeting devolved into an argument and Zelensky departed with no deal in place. The situation remains fluid, but Trump has balked at providing guarantees, insisting that European nations should bear the responsibility of providing security. European leaders met the following weekend for a summit to discuss support for Ukraine. 

What’s Keeping Us Up at Night…

1. US government shutdown: As of this writing, the likelihood of a budget resolution to avert a mid-March government shutdown remained uncertain. Republicans were  pushing for spending cuts to offset the extension of tax cuts that are set to expire at the end of this year, while Democrats were expected to vote along party lines in opposition of any bill until there are guarantees that appropriated funds will be spent as designated by Congress. 

2. Reciprocal tariffs: President Trump ordered an examination of reciprocal tariffs and value-added taxes (VATs) across US trading partners, with a deadline of April 1 for various agencies to report on unfair trade practices and policies. There are important implications if the US determines to follow through with reciprocal tariffs:

• Significant Trade Threat: Trump's proposal to include VAT as a tariff and potentially implement extreme tariffs could add 2% to US inflation and lead to stagflation, and possibly a global recession.

• Potential for Positive Outcomes: There's a possibility that the threat of tariffs could lead to lower global average tariff rates if countries reduce their own tariffs and VATs in response, benefiting growth and inflation.

Over the last several weeks, we may have witnessed the end of the Atlantic alliance, the military and political alliance led by the US that dominated the post-WW2 era.

3. Geopolitical uncertainty: Over the last several weeks, we may have witnessed the end of the Atlantic alliance, the military and political alliance led by the US that dominated the post-WW2 era. The new administration is attempting a strategic pivot to implement either a détente with Russia or relieve immediate tension with the country. It remains unclear what the end state of such a new paradigm would look like. Secretary of State Marco Rubio noted that this could be an attempt to break the existing relationship between Russia and China. 

However, it's unlikely that Europe will follow the US in this matter. Indeed, as stated by Secretary of Defense Pete Hegseth, the United States will no longer be the primary security guarantor of Europe. Following the tumultuous Zelensky meeting in the Oval Office, European powers may begin a rapid rearmament program that will require a substantial amount of fiscal spending. French President Emmanuel Macron has already announced creation of a European defense architecture.

The ending of the Atlantic alliance—informally at this point—likely means a more fragmented world, with additional volatility, increased fiscal spending in terms of defense, and the formation of additional trade blocs.

Investment Implications for Consideration

• Given how drawn out and uncertain the rate cycle has been, which is now compounded by geopolitical risks, we still favor total-return strategies that are less constrained by benchmarks. These could include global sovereign and currency strategies that potentially shine during these periods, or “go-anywhere” strategies that may be able to navigate the late cycle.

• Core-bond and core-bond-plus positions may make sense for all-in yields. Intermediate government/credit may be useful as a more risk-balanced way of adding a high-quality ballast into asset allocations. Moreover, recent slowing of economic data highlights a cooling of economic conditions.

• Securitized credit could be a potential hedge against rate volatility since it generally offers attractive risk-adjusted spreads. Senior parts of the capital structure, in particular, seem attractive in case the cycle turns negative faster than expected. For clients looking for higher expected returns, we favor select CLO equity, which allows locked-in, non-recourse, term financing for an actively managed pool of bank loans. 

• High yield warrants a cautious approach given the robust rally in spreads, including CCCs. We view bank loans (despite expected lower reference rates), convertibles, and capital securities as alternative places to deploy capital.

Representative Indices from Figure 4:

Global Aggregate: Bloomberg Global Aggregate Bond Index; Euro Aggregate: Bloomberg Global Aggregate Bond Index - European Euro; UK Aggregate: Bloomberg Global Aggregate Bond Index - United Kingdom; US Aggregate: Bloomberg US Aggregate Bond Index; US Fixed MBS: Bloomberg US MBS Index; US CMBS: Bloomberg CMBS ERISA Eligible Index; US ABS: Bloomberg Asset-Backed Securities Index; US IG Corporates: Bloomberg US Corporate Bond Index; US Corporates Aaa: Bloomberg Aaa Corporate Bond Index; US Corporates Aa: Bloomberg Aa Corporate Bond Index; US Corporates A: Bloomberg A Corporate Index; US Corporates Baa: Bloomberg Baa Corporate Bond Index; US High-Yield Corporates: Bloomberg US Corporate High Yield Bond Index; Global IG Corporates: Bloomberg Global Credit - Corporate Bond Index; Emerging-Markets Debt: Bloomberg Emerging Markets Hard Currency Bond Index.

Index Definitions:

Bloomberg Global Aggregate Index is a broad-based measure of the global investment-grade fixed-rate debt markets. Bloomberg Global Aggregate Bond Index - European Euro includes fixed-rate, investment-grade Euro denominated bonds. Bloomberg Global Aggregate Bond Index - United Kingdom includes fixed-rate, investment-grade sterling-denominated bonds. Bloomberg US Aggregate Bond Index is composed of securities from the Bloomberg Government/Credit Bond Index, Mortgage-Backed Securities Index, Asset-Backed Securities Index, and Commercial Mortgage-Backed Securities Index. Bloomberg US MBS Index tracks fixed-rate agency mortgage backed passthrough securities guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). Bloomberg CMBS ERISA Eligible Bond Index measures the performance of investment-grade commercial mortgage-backed securities, which are classes of securities that represent interests in pools of commercial mortgages. The index includes only CMBS that are Employee Retirement Income Security Act of 1974. Bloomberg Asset-Backed Securities Index, the ABS component of the Bloomberg US Aggregate Index, has three subsectors: credit and charge cards, autos, and utility. Bloomberg US Corporate Bond Index covers all publicly issued, fixed rate, nonconvertible, investment-grade debt. Bloomberg Aaa Corporate Bond Index is designed to measure the performance of investment-grade corporate bonds that have a credit rating of Aaa. Bloomberg Aa Corporate Bond Index is designed to measure the performance of investment-grade corporate bonds that have a credit rating of Aa. Bloomberg A Corporate Bond Index is designed to measure the performance of investment-grade corporate bonds that have a credit rating of A. Bloomberg Baa Corporate Bond Index is designed to measure the performance of investment-grade corporate bonds that have a credit rating of Baa. Bloomberg US Corporate High Yield Bond Index is an unmanaged broad-based market-value-weighted index that tracks the total return performance of non-investment grade, fixed-rate, publicly placed, dollar denominated and nonconvertible debt registered with the Securities and Exchange Commission. Bloomberg Global Credit - Corporate Bond Index is an unmanaged index considered representative of fixed rate, non-investment grade debt of companies in the US, developed markets, and emerging markets. Bloomberg Emerging Markets Hard Currency Bond Index includes USD-denominated debt from sovereign, quasi-sovereign, and corporate EM issuers. Morningstar/LSTA Leveraged Loan Index is a market-value-weighted index that is designed to measure the performance of the US leveraged loan market based upon market weightings, spreads, and interest payments. J.P. Morgan EMBI Global Diversified Index is a broad-based, unmanaged index which tracks liquid, US Dollar emerging-market fixed- and floating-rate debt instruments issued by sovereign and quasi-sovereign entities.

¹ GDPNow aggregates 13 components that make up US gross domestic product. It's based on mathematical results of a model and not an official forecast of the Federal Reserve Bank of Atlanta.