Since September, the Federal Reserve has elected to cut rates three times, each by 25 basis points, bringing the federal funds target range down to 3.5% – 3.75%. The Federal Open Market Committee (FOMC) members continue to navigate a challenging environment characterized by elevated prices alongside a softening job market. Chair of the Federal Reserve, Jerome Powell, cited rising downside risks to employment as the driving force behind the final rate cut of 2025 that came in early December. Looking into 2026, the market is pricing in two additional 25 basis point rate cuts.
2025 was an eventful year for both public and private credit markets. Artificial Intelligence is no longer a discussion topic for just equities. Mega cap tech companies have started ramping up debt issuance to help fund investments in AI infrastructure and have led the charge in what has been a stronger year for corporate debt issuance. Regarding private credit markets, there were a few high-profile defaults in the second half of 2025, which raised concerns about a potential bubble within the rapidly growing private credit space.
What does this all mean for bonds? As we have communicated in previous letters, bond prices increase when interest rates decrease. The yield curve was active in 2025, and its migration over the course of the year can best be described as a “bull steepening.” Bull steepening is characterized by an overall reduction in the level of the yield curve with the short end of the curve coming down more than the long end. In light of the migration just described and our expectation of a continued steepening of the curve, we have been buying bonds that are maturing in the next seven years for client portfolios. With regard to the recent defaults in the private credit space, events like these support our diligent research efforts to seek out and partner with very disciplined and conservative private credit managers.
