As we enter the home stretch of an eventful 2025, we're still singing the same tune: the window to extendportfolio maturities remains enticing and open (for now). Read on for our latest thoughts.
Although the daily headlines seem louder and more frequent than ever, the real underlying story that's important for investors has been the remarkably steady economic fundamentals and continued solid growth:
Moreover, we expect this favorable economic backdrop to persist into at least the first half of 2026 as the number of fundamental tailwinds are lining up to help keep growth on a positive trajectory:
Not surprisingly, credit metrics strongly suggest Corporate America is benefiting from these benign conditions. EBITDA margins remain robust, particularly impressive given all the tariff-related volatility.
Moreover, this profit growth has helped keep leverage measures contained despite elevated new issuance.
The good news also continues to be reflected in rating agency actions, with upgrades notably outpacing downgrades. All in all, it's a far cry from the fears of a deteriorating business environment that dominated April's "Liberation Day" market turmoil.
Normally a healthy economic setting implies steady to rising front-end rates, but that's not the case this time. In fact, the Federal Reserve has already started cutting the Fed Funds rate while signaling further easing should be expected.
Why the easing despite a reasonably healthy economy? Remember that personnel create policies. Fed Chair Powell's term ends early next year, and although the Trump Administration is still interviewing candidates to replace him, it's abundantly clear the President prefers those who appear committed to further meaningful rate cuts. There's no need to overthink this observation - for example, it's an open secret that that the lowest dots in the above "Dot Plot" belong to newly-appointed Fed Governor Stephen Miran, formerly a senior White House economic advisor. It stands to reason that future Fed appointments, including for the Chair's position, will likely hold similar philosophies.
In any case, as we've pointed out in previous Corporate Cash Alerts the market has long expected the next Fed moves would be lower, not higher. In fact, rates markets already accurately anticipated the Fed's initial cuts in Q3/Q4 2024 based on the yields available on front-end maturities.
We note that the decline in market-based rates notably accelerated in recent months once the pace of jobs growth softened.
As the Fed's dual mandate includes balancing the competing goals of stable inflation with a solid labor market, lately their focus has shifted more towards the latter (particularly as fears of a significant tariffinduced inflation spike have thus far proven unfounded). Short-term yields and spreads have naturally adjusted to reflect expectations of a lower-rate environment going forward.
Although the scale of these moves is notable on the preceding trailing-year charts, it's important to keep perspective. Yields are still at very reasonable levels, both in absolute terms and compared with the preceding zero-rate environments of the 2010s and the pandemic years. While we're off the highs throughout the curve, the window to extend maturities and capture meaningful income returns for the next few years is clearly still open.
Front-end rates are still inverted, which isn't unusual ahead of a Fed easing cycle, and that dynamic can make it harder to take the leap with longer durations. But as we've written before, "Extending in an inverted curve environment is always a leap of faith, but history tells us that it pays to prepare for lower rates well before the first storm clouds become visible on the horizon." (Corporate Cash Alert: What's Going On, 11/12/24). Reinvestment risk is a major concern for corporate cash portfolios, and short term investors are encouraged to consider reducing this risk by extending maturities.
