Don’t Wait for the All Clear

Rates and the Current Economic Backdrop

As markets continue through the second year of the Trump presidency, investors have been navigating volatility, first from tariffs following “Liberation Day” last year and now from the war in Iran, which has sent oil prices soaring. While those headlines drive the volatility, they also create opportunity.

Broadly speaking, both tariffs and geopolitical conflict tend to be inflationary in the short term but deflationary over time, as they weigh on demand and economic potential. It is notable that core rates markets have not fully shared the optimism evident in equities and credit.

The yield environment has changed considerably since the near-zero rate era of the 2010s. When interest rates sat near zero, as they did through much of 2020 and 2021, that created a dangerous environment for bond investors — as 2022 demonstrated. But currently, at the long end of the curve, the 30-year Treasury continues to flirt with, and occasionally break through, 5%. Over the past decade, that yield has closed in the high-4s or above only about twenty total trading days. For those who have been sitting on cash waiting for a time to add fixed income to their portfolio, the entry point they’ve been waiting for may already be here.

30-Year Treasury Yield, 10-Year History

Source: Bloomberg as of 31 May 2026

What Should Investors Expect from a Warsh Fed?

The Fed and its newly appointed Chair, Kevin Warsh, are in a difficult spot. Presumably, Trump nominated him on the assumption that Warsh could lower rates while maintaining credibility. But the first meeting left rates unchanged, as widely expected, as inflation has remained sticky. It did so without dissent, aided by the resignation of frequent spoiler Stephen Miran and the removal of easing bias language that caused multiple dissents over the statement in the previous meeting.

The meeting came across as hawkish, which surprised markets but shouldn’t have. It’s basic game theory: a new Fed Chair has to establish credibility early. If Chair Warsh doesn’t pick a fight with inflation at the outset, it’s extremely hard to rebuild credibility later.

It’s unlikely that Warsh will change Fed policy, but the market hasn’t had to adjust to a new Fed chair for some time now. This first meeting felt more like a regime change than a passing of the torch. Warsh announced a plethora of task forces to assess Fed communication, the balance sheet, and data, along with an assessment of the economy and inflation, with a goal of having answers by year end. Importantly, he gave no indication of revisiting the 2% inflation target.

Historically, these transitions involve some missteps and confusion, which can lead to volatility, but also opportunity.

AI, Credit Markets, and Corporate Bond Issuance

High yield spreads widened meaningfully in early 2025, staying above 300 for well over 100 days in 2025, versus roughly just three weeks this year. Currently, corporate credit spreads remain tight, but issuance is healthy. Interestingly, that issuance is coming from both sides of the AI trade: hyperscaler-driven supply and issuance from companies disrupted by AI, such as software companies.

High Yield Spreads, 2025 vs. 2026 YTD

Source: Bloomberg as of 31 May 2026

Broadly speaking, increased supply tends to widen spreads. There’s an interesting circular dynamic: hyperscalers issue debt to fund AI buildouts; AI disrupts other industries; those disrupted companies issue debt to respond to that disruption; and, overall, you end up with significantly more supply. This should pressure credit spreads at the margin. On top of that, AI-related issuance has begun creeping into the high-yield market. It’s still small, but it’s grown from under 1% to perhaps 2%–3% and rising.

Fixed Income Positioning and Why Now

For bond investors, the early phase of a selloff typically brings attractive front-end opportunities as managers raise cash and manage outflows by selling what is down the least. These tend to be compelling risk-adjusted trades, even if the total return is more modest due to low duration. Buying duration at the margin today is attractive. It’s a fallacy to wait for the “all clear.” Generally, when everything feels clear, investors are not compensated for risk. In fact, unintentionally, risks can be elevated. While no major changes to short-term rate policy are expected, Warsh will likely adjust communications and the Fed’s high-level philosophy, creating short-term volatility for investors to capitalize on.

When it comes to fixed income investing, it’s best to follow a two-pronged approach: staying invested for the long haul while leaning into risk when volatility is elevated, and compensation is justifiable.