Markets have been impacted by a range of tensions thus far in 2026, as private credit markdowns and fears of AI disruption have combined with geopolitical conflicts and a corresponding oil shock to drive economic instability and a rise in risk premiums across the globe.
Monetary policy expectations have concurrently pinballed through these choppy conditions in recent weeks, creating challenges for anyone attempting to time duration and disrupting financial assets in the process. Future probabilities for interest rates calculated using the CME FedWatch tool show this volatile dynamic playing out, effectively flipping the script from the market pricing cuts to hikes, then settling on a neutral policy stance for the Fed's final meeting of the year.
As is often the case in times of instability, the tendency for markets to overreact has been prevalent, and the prices for Fed funds futures are no exception. The swing in sentiment highlighted above extended far beyond expectations for the base rate, sparking a $2.5 trillion bond market sell-off that had a sweeping impact and produced dislocations across fixed income.
While anything can happen in the short term, market disruptions in recent weeks have created mispricings that have reshaped durable risk/reward considerations in fixed income. Taking the extensive opportunity set with an exceptionally wide spectrum of risks into account, we believe it makes sense to position systematically to monetize these mispricings while maintaining a balance of exposure to a broad distribution of potential outcomes for what can happen next to the economy. This type of framework can offer a critical advantage amidst heightened uncertainty around geopolitical relationships as markets recalibrate to a new trajectory for policy moving forward.
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