Key Takeaways from Part 1:
- The Fed’s dual mandate is still intact: employment is softening but not alarming, and inflation is cooling with official measures in the mid-2% range.
- The risk of a near-term spike in rates is low, while the potential for capital appreciation is real if rate cuts come later this year.
- Political and secular risks are acknowledged, but Jim explains why they are not an immediate threat to bond investors.
Part 1 of 3: "The Fed’s Waiting Game: Why It’s Good News for Bond Investors"
This is the first in a three-part series outlining why I believe bonds are set to outperform. Here, I focus on the Federal Reserve’s dual mandate, the June 2025 meeting, and why the Fed’s approach is positive for bond investors. Parts 2 and 3 will address valuation, politics, recession risk, and the secular horizon.
With everyone focused on the Fed’s meeting this week, I want to lay out why, despite widespread skepticism, I still see a strong case for owning bonds. The mainstream narrative is dominated by concerns about debt and deficits, but I believe those risks are more relevant over at least a 3–5 year horizon, not today. At current yields, U.S. Treasuries remain attractive, and the Fed’s approach is a key reason why.
The Fed’s Dual Mandate: What Matters Most Right Now
Full Employment: Cracks, But No Crisis
The Fed’s job is to balance full employment with stable prices. Employment is still relatively strong, but we’re starting to see some potential cracks:
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Unemployment: Has drifted up from 3.4% in 2023 to about 4.2% now. That’s not alarming—it’s actually close to what I’d call “normal” unemployment, and not enough to trigger a policy shift.
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Jobless Claims: We saw a recent peak in continuing claims—1.9 million in June, both the highest since 2021 and above consensus estimates—but it’s just one data point. The Powell Fed has shown it doesn’t overreact to a single print.
Stable Prices: Inflation Is Cooling, But Risks Linger
On inflation, the story is one of steady improvement:
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Inflation Prints: Month after month, inflation has undershot expectations. Official measures are in the mid-2% range (PCE ~2.5%, CPI ~2.4%).
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Expectations: The 10-year breakeven inflation rate sits at 2.27%, muted by historical standards.
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Risks: Tariff policy and immigration could push inflation higher, but so far, those pressures have been modest in the data.
This Week’s Fed Meeting: Why “Wait and See” Is the Right Call
I expect the Fed to hold rates steady this week—this is a “nothing” meeting in my view. There’s just no strong impetus to move right now:
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Macro Backdrop: The economy is solid, equities have rebounded, inflation is cooling, and the labor market, while softening, is not flashing red.
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Consensus Outlook: I, like many, expect 25–50 basis points of cuts later this year, likely starting in September if conditions don’t change materially. The risk of acting too soon and having to reverse course is much greater than the risk of waiting another quarter.
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Geopolitics and Oil: Oil is the biggest wildcard. Continued escalation in the Middle East will push oil higher, which would flow directly into inflation. Lowering rates now could also weaken the dollar, which could make oil even more expensive. The Fed doesn’t want to risk that. However, should the conflict persist and spill over to global growth expectations, it would force their hand to cut. This is another layer in the “wait and see” balancing act taking place.
Bond Prices Offer Profit Potential
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Attractive Yields: 3-month and 10-year Treasuries are both yielding around 4.4%, which is compelling income in this environment.
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Yield Curve: The 10-year/2-year spread is about 45 basis points, low by historical standards, but still offering attractive additional carry.
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Valuation: 10-year yields are off their April lows but still below where they started the year. I believe fears of runaway rates are overblown in the near term.
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Potential Returns: For a 10-year Treasury, a 50-basis point rate cut, and a parallel shift in the curve, could deliver about 4% in returns.
Political and Secular Considerations
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Policy Pressure: The administration wants lower rates to ease the federal interest expense burden, which now tops $1 trillion per year. The next Fed chair, to be selected in 2026, will likely be aligned with that goal.
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Long-Term Risks: Yes, the secular risks—demographics, spending, and debt—are real, but those are 3–5 year issues. If they become acute, I expect the Fed to step in with yield curve controls, just as it did after WWII and as Japan has done more recently.
Conclusion: The Fed’s Patience Is Good for Bonds
The Fed’s “wait and see” approach is exactly what’s needed right now. There’s no urgency to cut, and by holding steady, the Fed avoids the risk of having to reverse course. For bond investors, this patience is constructive: yields are attractive, the risk of a near-term spike in rates is low, and the potential for capital appreciation is real if rate cuts come later this year. That’s why, despite all the noise, I continue to see a strong case for owning U.S. Treasuries at current levels.
Gain clarity on H1 & strategize for the remainder of the year. Register now for the Midyear Market Outlook Symposium on June 26 at 11 am ET.
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