Fixed-income managers at the Morningstar Investment Conference were divided on the prospect of the US economy entering recession as a result of President Donald Trump’s tariff program.
Michael L McEachern, head of public markets at Muzinich & Co, says that the US should escape recession, but that economic growth will remain low and that falling inflation will allow the Federal Reserve to cut interest rates.
A lot depends on whether the Trump administration continues to “walk back” on announced tariff rates, such as those imposed on the automotive industry. “If nothing changes, the US goes into recession,” says Iain Stealey, international CIO within the global fixed income, currency and commodities group at JP Morgan. More “walk backs” can avert recession, he says, but for now investors don’t know how much economic damage has already been done. The “soft” data, ie that gathered by economists on sentiment, anecdotal inputs and short-term surveys, is currently “horrible,” Stealey says.
Assessing the Economic Damage
The real economic data is to come, with May data, due in June, key to assessing the economic damage. Still, he says that if the economic data deteriorates sharply in the US, the Federal Reserve has ample ammunition to cut rates.
For Michael Matthews, co-head of fixed income at Invesco, the odds of a US recession are currently 50/50.
In the recent turmoil, when US bonds unexpectedly sold off in tandem with equities, sending yields higher, investors have started to debate whether Treasuries lost their safe-haven status. The managers were skeptical about this argument.
Muzinich’s McEachern says there’s little evidence that this status will be challenged. “Where else are you going to invest with this liquidity and transparency?” he asks, dismissing the idea that global investors will shift into Chinese sovereign bonds as an alternative. JP Morgan’s Stealey agrees that US Treasuries will retain their safe-haven status, although the potential for more US spending will sour investor appetite for longer-dated Treasuries. “The US deficit is in a horrible place to start with,” he says.
UK Inflation ‘Relatively Tamed’
Looking at the UK gilt market, Invesco’s Matthews says that UK bonds are preoccupied with the government’s fiscal constraints, as outlined in the Autumn Statement in October 2025 when spending was cut to meet the “fiscal rules.” But UK inflation, a previous concern of bonds investors, is relatively tamed, he adds. Sterling’s appreciation against the dollar has made imports cheaper, while falling oil prices have kept a lid on domestic energy costs. External threats are more of a concern for the fund manager, and he lists tariffs, supply chain issues and geopolitical risks, such as the prospect of China invading Taiwan. He adds that the Invesco equities team have started to become more positive on UK equities, particularly housebuilders.
In such a turbulent time for bonds, where are these professional investors looking? Invesco’s Matthews has been adding longer-dated bonds, where yields have been rising as investors have sold out over fears over long-term debt sustainability. “Everyone hates the long end,” he says. “It’s a bit scary at times but you’re getting paid for [taking the risk]”.
In terms of corporate debt, should investors expect a wave of defaults as tariffs bite? Muzinich’s McEachern is less worried than in previous market cycles. Default rates may increase slightly he says, but the companies are in better shape financially and are more resilient to external shocks. “Slowdowns affect credit but there’s plenty of cushion there,” he says.
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