Interest rate cuts delays and the upcoming US election could lead to market volatility in the second half of the year, according to some asset managers. Recent inflation data and Fed commentary suggest rate cuts this year, but there may be challenges for further cuts next year. Ken Orchard, head of international fixed income at T Rowe Price, believes inflation may not decrease enough to support more rate cuts next year, potentially leading to higher rates and yields. Orchard advises investors to be cautious of what is priced in the rates market versus what may actually happen. He has kept overall duration lower in his portfolio to reduce interest rate risk.
Orchard also highlighted the risk of economic growth picking up faster than expected, which could force central banks to respond with rate hikes. He warned that unexpected events could trigger market volatility, advising investors to manage their exposure to riskier fixed income assets flexibly. The US election uncertainty is expected to contribute to bond market volatility, with the base case being a divided US government regardless of the election outcome. This scenario is considered favorable for markets as it would limit new spending programs and tax cuts.
In the near term, bond market volatility may also be influenced by political uncertainty. Investors are advised to monitor economic data closely as it will be more important than central bank rhetoric. Developed market bonds are seen as valuable due to meaningful coupons, but investors should be prepared for increased volatility in the second half of the year as focus shifts to the political landscape.