Welcome back to Schwab Impact here at the Colorado Convention Center. Interest rates, they've been rising since Fed Chair Pal's more hawkish comments during last week's news conference. Kathy Jones is Schwab's chief fixed income strategist and joins us now.It's good to see you. >> Hi, Scott. >> What do you make of the back up in rates.>> You know, I think the market just got way over its skis and expectations for Fed easing. I'm not really sure why because the data weren't really that compelling. Um but now ...

Core Insights - Citadel Securities has initiated a partnership to process trades for small and mid-tier banks, aiming to enhance pricing on fixed-income securities [1] Group 1 - The partnership is designed to provide better pricing for fixed-income securities to small and mid-tier banks [1] - Jim Esposito, President of Citadel Securities, discussed this initiative on Bloomberg Television [1]

Group 1 - The Federal Reserve's decision to cut interest rates by 25 basis points is expected to influence the housing market by encouraging more buyers, which may lead to increased property prices [3][6]. - The individual mentioned in the letter has a stable financial situation with a monthly income of $6,000, consisting of various retirement accounts and Social Security, indicating a comfortable lifestyle [2][6]. - The impact of the Fed's rate cut is less significant for those on fixed incomes, as they do not rely on fluctuating interest rates for business operations or debt consolidation [6]. Group 2 - The letter highlights the broader economic context, including concerns about the slowing jobs market and the effects of tariffs on business costs and consumer prices [6]. - The rate cut is anticipated to positively affect the stock market, benefiting retirement accounts like IRAs, as Wall Street may respond favorably to the Fed's actions [6].

Core Insights - Alternative investments are gaining renewed interest from advisors and investors seeking options beyond equities and fixed income [1] Group 1 - The resurgence of alternative investments indicates a shift in investor preferences towards diversification [1] - Historical forms of alternative investments are being re-evaluated for their potential benefits in current market conditions [1]

Non-consensus bets for the rest of 2025:Private creditDeFi options protocolsFixed incomeNFTsL2sMemesWhat else am I missing? ...

Market & Economic Assessment - The Fed is in a difficult position, balancing inflation pressures with calls for rate cuts, while the economy grows between 2% and 3% [2][3] - Current market conditions, including high equity prices, low volatility, and tight credit spreads, are atypical for a rate-cutting cycle [3][4] - Speculative behavior is prevalent, with tight credit spreads making fixed income investments interest rate sensitive [5] - Fiscal policy is challenging, with $37 trillion in debt and a $2 trillion deficit, while the Fed maintains a $7 trillion balance sheet [7] - Inflationary pressures persist, particularly in construction costs and wages, making a return to zero rates unlikely [8] - The long end of the yield curve signals concerns about the US fiscal situation, as the 30-year Treasury yield is higher than when Fed funds were 51/8% [10][11] Investment Strategy & Risk - The administration's policies favor risk assets, but this may not be favorable for fixed income [6][24][27] - Investors should be cautious about taking on excessive risk in fixed income portfolios, particularly through high yield credit at tight spreads [6][15] - Private credit funds raise concerns, especially the push to include illiquid assets in liquid investment vehicles, echoing concerns from 2007 [15][16][18] - Meme stock activity indicates that investors are unafraid, with one penny stock accounting for 15% of stock exchange volume [20][21] - While the overall risk environment is favorable, it is susceptible to shocks, requiring careful monitoring and liquidity [26][27][25]

Treasury Market & Fiscal Policy - The market has largely priced in the impact of the "one big beautiful bill" (tax bill) [2][3] - Tariff revenues are projected to offset a significant portion of the tax bill's cost, with CBO projecting $28 trillion in tariff revenues versus the tax bill's $32 trillion cost [3] - The yield curve has steepened, indicating the market is pricing in an unsustainable deficit trajectory [4] - The market is pricing in some base level of tariffs, potentially 10% on the world and 30% on China or transshipment [7] Economic Outlook & Fed Policy - The underlying economy is slowing but remains above recession levels, leading to expectations of a soft landing [4][5] - Inflation has come in weaker in recent months, leading the market to price in Fed rate cuts, approximately 100 to 120 basis points [5][6] - The market anticipates "good news rate cuts" from the Fed due to the slowing economy and potential for one-time price shocks from tariffs [6] - A risk scenario involves sectoral tariffs causing mini humps or bumps in inflation, which the Fed is closely monitoring [9][10] Fixed Income Investment Strategy - In a soft landing scenario with growth around 1% to 15% and inflation slightly higher, a 4% to 45% tenure seems fair [12] - High-quality fixed income offers attractive yields around 6% to 65%, while high-quality high yield provides around 7% [12] - Fixed income looks attractive due to the potential for diversification and the likelihood of the Fed cutting rates further if the economy slows down [13]