Living in the now Living in the now http://www.federatedinvestors.com/texPool/static/images/texpool/texpool-logo-amp.png http://www.federatedinvestors.com/texPool/daf\images\insights\article\woman-looking-at-watch-outdoor-small.jpg January 23 2026 January 23 2026

Living in the now

If the future keeps bond investors awake at night, the present is complicated too.
Published January 23 2026

There’s no shortage of macro-economic factors for bond investors to consider as 2026 gets underway. Speculation about current surprises and future outcomes may get most of the attention, but lagging data has to be considered too. Lately, as I field what should be direct questions about fixed income markets, I find the need to cover a wide range of topics. Here are several that are sparking conversations with clients and colleagues.

Employment A prime source of concern that could surprise is a modest stabilization of the labor and jobs market dynamic. There are more demographic knowns than unknowns and companies appear to be establishing a path forward rather than marching in place. The headlines (AI, layoffs, workforce) appear distorted in the discussion of the labor market—nonfarm payroll growth of 30,000 a month (as assessed by the Dallas Fed) is breakeven and the weekly data doesn’t indicate a pick-up in layoffs. 

Computation vs. measurement Some themes emerge post government shutdown with what we learned when the data collection stopped. Calculations influence the reported data. Most are not a measurement, like weight or temperature. For example, inflation is calculated with items measured at various points in the year and imputed at others. Also, the different weightings of the calculation of consumer prices (CPI) vs. producer (PCE) matter. CPI is released earlier in the month with PCE about two weeks later. The market leans into CPI as an indicator and can assess and forecast PCE based on that data. The Fed reviews PCE. 

Nuance matters The current economy is broadly in equilibrium, with inflation sticky and jobs just a tick off of their steady state. Any breakout of data will take time to assess and will arise from a long look back in the rearview mirror rather than steering forward. Volatility is very low. It makes sense to invest for the now, rather than attempt to time future extremes. Recent short-lived volatility supports this approach.

Liquidity It has been a long time since liquidity was not a given. This factor has been undervalued and illiquidity has not been carefully assessed as of late—one example of where forward thinking should be stressed.

The Federal Reserve While the current drama centers around the Chair and composition of the committee, our view is that the measured tone the committee provides on interest rate decisions remains the counterbalancing force to the rhetoric.

Speaking of rates The Fed directly influences the short end of the curve. How far along the curve their influence extends drives why they are adjusting their rate. The remaining eases this time around will be used to get even closer to neutral policy, and will have less influence than times when the policy is being used to fix or correct.

So, what about the long end? Risks include inflation, geopolitical and relative value. With Japan yields pushing higher, the relative value realm is shifting. Overall, even if the front of the curve moves little, the longer end will be firm to pushing ever so slightly higher because of the balance of risks. Again, this dynamic is likely muted rather than extreme. 

What could stir the pot?

  • Japan A regime shift on rates could prompt a reassessment of global government bond investments and currency positions.
  • Geopolitical Recently we’ve seen low volatility and measured responses to issues that arise quickly and recede even faster. We think that Taiwan is an example of what might be a different case. Are chips the new oil?
  • AI Too much too soon will make it appear that the broad fixed income market (Corporates/ABS/other structures) is in trouble. A move off the extreme lows and insensitivity to value with a sharper look at underlying credit could push spreads wider but to a reasonable level that restores value. For the patient this is an opportunity. In all, winners and losers will emerge. The rating agencies will likely be patient here. 
  • Affordability How many tools will be used, and to what extent to ensure more volume in the housing market? The shape of the curve could be disrupted if intervention is apparent.  

Running down the fixed income sectors:

Mortgage backed securities (MBS) The announcement that Fannie Mae and Freddy Mac would purchase $200 billion of MBS prompted a quick and extreme tightening of spreads for these securities. That said, spreads can hold in this area for quite some time and we remain neutral. Some investors may rotate out to seek better value elsewhere. 

Asset backed securities (ABS) are overall grinding tighter amid solid demand. There has been some movement in the credit card area on the mention of a 10% interest rate holiday, but it’s been modest in the context of the entire ABS universe.

Corporate bonds The prevailing theme of tighter spreads remains true for investment grade (IG) corporate bonds as well. Supply has been significant, but more than matched by demand. Earnings season will matter not only in terms of who beats or disappoints and outlook, but also because issuance will surge following the earnings. AI issuance, along with new debt to pay for mergers and acquisitions (M&A), could prompt some spread movement wider. We would consider this as a restoration of value rather than an indicator of a problem and remain underweight.

High Yield (HY) Some of the IG themes above will emerge with broader issuance; however, valuations relative to history (and risk) are exceptionally tight here. We remain underweight.

Emerging markets (EM) Spreads have tightened over the 4th quarter and year-to-date periods. This market provides three distinct ways to express conviction: sovereign debt, local currency, and hard currency corporate debt. We think the US dollar will continue its descent, but not follow a smooth line, providing opportunities to adjust positioning. Should that prove untrue, it would broadly test EM.

Read more about our current views and positioning as Fixed Income Perspectives

Connect with Karen on LinkedIn


 

Tags Fixed Income . Interest Rates . Monetary Policy . Markets/Economy .
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Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices.  In addition, fixed income investors should be aware of other risks such as credit risk, inflation risk, call risk and liquidity risk.

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