Fed Chair prepares to hand over the reins
As widely expected, US Federal Reserve policymakers left the federal funds rate unchanged at their April meeting. The decision itself was not a surprise. What was more notable was the internal division it revealed.
Four policymakers dissented, the most since 1992, with three objecting to the easing bias in the statement; and one, preferring an immediate rate cut. The hawkish dissents, in particular, underscore just how difficult it will be for the Fed to communicate a coherent forward guidance in the months ahead.
Treasury yields reacted accordingly. Markets are now pricing-out the prospect of near-term rate cuts. With oil prices around USD 100 per barrel and Personal Consumption Expenditures inflation still running at roughly 3.5% annually, the Fed’s reluctance to signal further easing is entirely understandable, even if politically inconvenient.
Adding another layer of uncertainty is the imminent change of leadership at the Federal Reserve. Jerome Powell’s term as Chair ends on 15 May. The prospect of Trump’s nominee Kevin Warsh at the helm has fuelled speculation about a more market-oriented approach to monetary policy. As a general rule, Fed transitions tend to increase rate and spread volatility, as markets begin repricing future policy before the new Chair has had a chance to establish credibility.
The 30-year US Treasury yield briefly touched 5.03% during the week, a level that reflects a structural repricing of long-term fiscal risk rather than short-term rate expectations alone. Elevated supply, a political environment that complicates fiscal consolidation and persistent above-target inflation are all contributing factors. In Europe, ten-year Bund yields are holding at around 3 to 3.10%, and UK gilts have pushed above 5.0% at the ten-year point. This broad-based rise in sovereign yields across major markets signals that term premiums are being rebuilt after years of suppression.
Our positioning reflects this environment. We continue to prefer the intermediate part of the yield curve, where carry remains attractive and duration risk is more manageable. Within credit, we maintain a preference for high-quality investment grade bonds and a prudent approach to high yield.