Federal Reserve Policy & Economic Outlook - The Federal Reserve cut rates for the third consecutive time this year, despite growing dissent [1] - The Fed is committed to purchasing $40 billion of Treasury bills per month [1] - The base case is a hold on further rate cuts, contingent on weakening labor market or improved inflation [3] - Markets are predicting a different path than the Fed's dot plot, with expectations of rate cuts between 3% and 3.25% [5] - There is a risk of losing Fed independence, which could cause yields to rise [17] Inflation & Labor Market - Tariffs are estimated to contribute approximately 0.5 percentage points to inflation [9] - The Fed is facing a difficult balancing act with inflation above target and a weakening labor market [8] - The Fed has delivered 175 basis points of cuts [43] Credit Market Dynamics - High-grade bond sales cooled in December, with $4.7 billion sold, a quarter below the previous period [26] - December bond sales in high yield exceeded $20 billion, the busiest December since 2020 [26] - Investment grade supply is expected to grow year-over-year, reaching approximately $1.8 trillion to $1.9 trillion in 2026 [30] - Tech supply was up 75% and is expected to double, driven by hyperscalers' CAPEX expansion [32]

Federal Reserve Policy & Inflation - The Fed faces pressure regarding its future policy path, with potential easing trajectory influenced by dovish FOMC members [1][2] - Inflation remains above the Fed's 2% target, with PCE stabilizing but still not at the desired level [2][3][4] - The market anticipates a potential rate cut in September, with odds around 88%, but the pace of future cuts depends on labor market data and inflation [11][12][13] - The Fed's dual mandate of managing inflation and promoting employment creates a conflict, requiring a measured approach to rate cuts [15][16] - Maintaining market confidence and the Fed's credibility in fighting inflation is crucial [17] Treasury & Bond Market - Treasury auctions for 2, 5, and 7-year notes fell just shy of $100 billion, with sales expected to increase [18] - Attractive yield levels are enticing investors, balancing against tight credit spreads [21] - High-yield bonds offer competitive returns compared to equity markets, with strong fundamentals and contained default rates [23] - Shorter-duration, off-the-run credit space presents value with potentially higher yields (8%-9%) and good fundamentals [28] - Institutional concerns around the Fed and fiscal policy are keeping long-end yields elevated [32] Credit Market & Risk - Concerns exist about credit spreads remaining tight despite relatively high default rates, potentially masking underlying issues [19][20] - The high-yield market's risk-adjusted return may not compensate for potential margin compression and downgrades [26] - Public credit markets may be benefiting from weaker credits staying in private markets [31] - The market anticipates U S payrolls report [36]