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<\/figure>\n\n\n\nSource: Schroders Global Unconstrained Fixed Income team, September 2025<\/em>. For illustrative purposes only. % probabilities assigned to each scenario. We define a hard landing as one in which the Fed has moved rates by the end of 2026 into stimulative (e.g. below 3%) territory and a no landing as one where they have kept rates restrictive – we define it as above 4%. A soft-landing is one in which the Fed moves policy to within this band. <\/em>“Soft landing” refers to a scenario where economic growth slows and inflation pressures ease, allowing modest further rate cuts; \u201chard landing\u201d refers to a sharp fall in economic activity and deeper rate cuts are deemed necessary; \u201cno landing\u201d refers to a scenario in which inflation remains sticky and interest rates may be required to be kept higher for longer.<\/em><\/p>\n\n\n\n Importantly though, we need to assimilate this economic outlook with what is priced into bond markets to assess the risk versus reward of our portfolio positions.<\/p>\n\n\n\n With US Treasury yields having already fallen (yields move inversely to price), we believe that about 50% of our estimation of hard landing is already in the price of bond markets. That\u2019s why, when it comes to our overall view on interest rate (or duration), we don\u2019t oppose rates market pricing at this stage, but neither do we seek to chase it. We wait patiently for better opportunities to arise.<\/p>\n\n\n\n The US labour market has been in stasis over recent months. For cyclical assets, such as credit and equities, a slowdown in the labour market accompanied by easier monetary policy has so far been unproblematic, but a further, deep downturn in the labour market would be a problem.<\/p>\n\n\n\n So do we see a labour market recession from here as likely? In short, no. Our view is that the recent stall-speed reflects high uncertainty and companies have rationally held off both hiring and firing. As uncertainty eases, we expect stabilisation, but not a sharp rebound.<\/p>\n\n\n\n We wrote last month that we felt the need for the ECB to ease rates further was limited and that they were moving towards agreeing with that assessment. Since then, our views on the matter are little changed and President Lagarde\u2019s recent press conference suggested the governing council\u2019s view continues to move in our direction.<\/p>\n\n\n\n We believe there remains room for eurozone yields to move modestly higher as the further cuts priced in for the ECB are removed, but also for curves to steepen (i.e. longer dated bond yields move comparatively higher to shorter maturities) due to worsening supply-and-demand dynamics for long-end bonds.<\/p>\n\n\n\n We\u2019ve mentioned our neutral view on interest rate risk, but how about our asset allocation views?<\/p>\n\n\n\n We continue to be wary of corporate credit in both investment grade (IG) and high yield (HY). While fundamentals like corporate profitability remain solid, valuations do not. Any weakening of the market would be an opportunity to add, but for now we are happy to wait patiently on the sidelines.<\/p>\n\n\n\n Instead, we continue to see better value in areas such as agency mortgage-backed securities (MBS), covered bonds (which are highly rates-securitised assets) and emerging market debt (both local currency and denominated in euros).<\/p>\n\n\n\n —<\/p>\n\n\n\nLabour market slowdown, or labour market recession?<\/h2>\n\n\n\n
Why cut further? ECB back at neutral and happy there<\/h2>\n\n\n\n
Waiting for better opportunities<\/h2>\n\n\n\n