A senior macro strategist has warned that fixed income markets are the most vulnerable asset class in the current economic cycle amid uncertainty triggered by geopolitical tensions in the Middle East.
In this line, David Cervantes, founder of Pinebook Capital, identified bonds, particularly longer-duration government debt, as the segment most exposed to downside, he said in an interview with David Lin published on April 13.
His outlook is anchored on the expectation that the labor market will remain stable, reducing the likelihood of near-term monetary easing.
With unemployment holding around 4.3%, Cervantes expects economic conditions to stay firm enough to prevent the Federal Reserve from cutting interest rates this year.
“The asset that’s most at risk is fixed income, as long as the labor market holds up. <…> I think late in the year, I’m not calling for a hike, but the Fed will start communicating and start leaning hawkish. <…> I would say bonds are more likely to suffer than any other asset class out there,” he said.
Economic buffer
Instead, he anticipates a shift in communication toward a more hawkish stance later in the year, even if policymakers ultimately leave rates unchanged.
A key factor supporting this view is the continued surge in artificial intelligence-related investment, which he estimates is contributing roughly 2% to GDP.
This spending is acting as a buffer for the broader economy, reinforcing business activity and reducing the risk of a sharp downturn in employment.
“There’s a tailwind to the economy. That’s the AI spend. That is a huge buffer and provides resiliency to the business cycle. As long as you’ve got the AI trade going on, I find it really hard to make an argument that the labor market’s going to fall apart and therefore the Fed will be incentivized or motivated to cut this year. I just don’t see it happening,” he added.
At the same time, inflationary pressures remain a concern beyond energy markets. While policymakers may look through temporary oil-related shocks, rising costs in goods and services, including travel, are feeding into core inflation, increasing the likelihood that the central bank maintains a tightening bias.
Against this backdrop, Cervantes sees limited justification for rate cuts in the near term. As a result, bond markets, particularly the 10-year segment, face heightened risk, as yields could remain elevated or move higher, putting downward pressure on prices.
