INVESTING
Furthermore, there’ s been a breakdown in the conventional correlations we’ re used to in the financial markets: For instance, since the Fed started cutting interest rates in 2024, the U. S. dollar declined against most major currencies, when cuts in the past led to dollar rallies.
In an October commentary, Robert Tipp, chief investment strategist and head of global bonds at PGIM, remarked that“ negatives can be positives.” The inflationary impact of a more dovish Fed is certainly a concern, but the short-term result is likely to be a steeper yield curve and a rally in the short-term end of the bond market.
Several fixed-income investors note that emerging market bonds have higher yields than comparable developed market issues and their countries have better demographics and sounder fiscal conditions. off?’” he says.“ But CEOs are looking to deploy workers in a more efficient way.”
Weisman thinks that many of the stimulative effects from the president’ s signature tax and policy legislation, the One Big Beautiful Bill Act signed this past summer, are likely to kick in next year and that“ 2026 is shaping up to be strong.” It’ s always possible there will be a stock market correction and, with the wealth effect fueling a lot of consumer spending, that could change the economy’ s foundation.
He thinks the recent weakness in nonfarm payrolls over the summer was partially a reaction to uncertainty triggered by President Trump’ s mercurial policies on tariffs, the Department of Government Efficiency( DOGE) and Fed independence. By next year, however, the brighter side of those policies, including deregulation, lower taxes and full expensing of capital outlays, will take center stage. He places the odds of a recession as slim— at about“ one out of six or seven.”
A major downshift in the labor market, Tipp wrote,“ could easily prompt fed funds pricing to drop from the current expected terminal rate in the 3 % area— estimated to be in the neutral range— into the more accommodative 2 % realm.”
The growth of the labor market has flattened out this year, and some suspect the“ no hiring, no firing” conditions may last longer than people anticipate. A confluence of factors point to slower job growth: One is the rampant adoption of AI. Next is a wave of people retiring, first baby boomers and more recently Gen Xers. And finally there’ s the curtailing of immigration. Gundlach told clients in September that he wouldn’ t be surprised to see the long-term monthly rate of non-farm payrolls fall dramatically from 150,000 a month to the 50,000 area.
Tipp sees“ bullish implications” for the yield curve from these labor trends in the short term and“ marginally bullish” ramifications for Western and emerging markets. It’ s not certain, however, where markets would settle if the central bank were to cut rates aggressively in response to a slowdown.
Joe Davis, Vanguard’ s global chief economist, said that making a determination about inflation will mean figuring out where the labor market is in six to 12 months.“ The Fed is assuming [ the recent uptick in ] inflation is temporary,” Davis said in a Bloomberg TV interview in mid-October. He added that it was clear the nation didn’ t still have an inflation problem like the one it had in 2022.
Faced with a long-term shortage of workers, head counts may not rise the way they once did, but at the same time, Corporate America“ isn’ t looking to lay people off,” says Erik Weisman, chief economist and portfolio manager at MFS.“ Boards aren’ t asking‘ Why can’ t we lay people
The Debasement Trade And Bonds
All these things and more are affecting investors’ attitudes about bonds. For instance, all the talk about government budget deficits in the U. S. and other developed nations is fueling the so-called“ debasement trade”— in which investors move out of government debt and cash into things like cryptocurrencies and particularly gold, assets that have indeed trounced most other markets.
The house view at Vanguard holds that business conditions are likely to improve in 2026, though this could mean the Fed will not be able to deliver the scale of rate cuts that bond bulls are expecting. Investors of all stripes talk about how expensive U. S. equities are, but Vanguard and other investors see domestic bonds as pricey, too.
Several fixed-income investors note that emerging market bonds have higher yields than comparable developed market issues and their countries have better demographics and sounder fiscal conditions. China is finally letting its currency appreciate, which also benefits emerging markets, Weisman says. continued on page 58
36 | FINANCIAL ADVISOR MAGAZINE | NOVEMBER 2025 WWW. FA-MAG. COM