Fidelity International: Currently, short-term bonds with attractive yields are a good choice

According to the Zhitong Finance APP, Fidelity International fund manager Rick Patel recently commented on the U.S. credit bond market. There are many unknown factors in the future, and market volatility may continue to fluctuate with changes in tariff situations. In the face of a challenging market environment, it is crucial to maintain a proactive, agile, and diversified investment layout, especially through defensive allocations to sustain yield buffers. Currently, short-term bonds with attractive yields are a good choice. Through strategic allocation of U.S. dollar bond assets, there are still opportunities to generate excess returns, continuing the relatively strong performance since the beginning of the year and after the "Liberation Day."

Rick Patel stated that despite recent fluctuations in U.S. Treasury yields, the overall trend remains relatively stable. By the end of April, the yield on the 10-year U.S. Treasury bond was about 10 basis points higher than at the beginning of April, but still about 50 basis points lower than the peak in January of this year. Similarly, the yield on the 30-year Treasury bond accumulated an increase of about 20 basis points in April, but has remained flat year-to-date. For decades, the U.S. has relied on foreign capital to finance its twin deficits, but now the U.S. is at the center of the tariff storm, and global investors, due to increased uncertainty and a higher likelihood of an economic slowdown in the U.S., are beginning to expect higher returns before they are willing to invest in U.S. Treasuries.

Rick Patel mentioned that the degree of future economic slowdown will ultimately depend on how U.S. companies respond to tariff pressures, whether they choose to compress profits to absorb costs or pass them on through price increases. The earnings reports currently being released by S&P 500 companies provide some insight into how companies are coping with tariff impacts, which can help investors assess the potential degree of economic slowdown ahead.

As for the performance of the U.S. labor market, most of the job growth in 2024 is expected to come from the healthcare and government sectors. It is worth noting that the latest leading indicator for temporary healthcare employment is gradually declining, and the demand for nurses has seen a decrease compared to the same period last year for the first time. The government sector is also facing ongoing challenges, which may put pressure on employment data in the future.

Rick Patel believes that given expectations for future structural growth and inflation to both moderate, the current federal funds rate of 4.25% seems too high. Recent statements from the Federal Reserve appear to show no willingness to cut rates, and action will depend on specific catalytic factors. A deterioration in the labor market could serve as a catalyst, as the Federal Reserve aims to ensure the achievement of its dual policy objectives, with maximum employment being one of them.

Rick Patel mentioned that from a downside risk perspective, if an economic recession occurs and leads to severe unemployment immediately, the Federal Reserve will have to take more aggressive rate cuts than the market expects. More specifically, due to the delayed transmission of monetary policy, this economic cycle is different from previous ones; even if the Fed cuts rates by 25 basis points in several future meetings, it will not effectively boost the U.S. real economy. For example, about 75% of U.S. households have fixed-rate mortgages below 5%, as many families refinanced during the pandemic at low rates, which are significantly lower than current market levels. Meanwhile, borrowing rates for small and medium-sized enterprises are astonishingly high, as more than half of their employees are U.S. workers, which has a significant impact. Although this poses a potential tail risk, market prices currently do not reflect the likelihood of such a scenario occurring. If it does happen, the federal funds rate is expected to drop below 2%, as this is the only viable method for the Federal Reserve to support the real economy