Market Watch
Time for Bonds?
Interest rate policy is shifting. The Federal Reserve meets again this week, and the stakes for rate cuts are unusually high. At its last meeting, the Fed kept rates steady at 4.25%–4.50% for the fifth consecutive time. No surprise there. But the tone shifted noticeably at the Jackson Hole symposium, where policymakers signaled they could begin cutting rates as early as this month.
“With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”
— Fed Chair Jerome Powell
This shift raises an important question: why is the Fed now considering easing policy and Is it time to rotate into bonds?
And yet, here we are — about to get rate cuts.
The reason lies in slowing growth and a softening labor market. GDP grew just 1.4% in the first half of 2025, with the first quarter even shrinking by 0.5% before rebounding in Q2. Labor data is flashing yellow: only 22,000 jobs were added in August, and revisions revealed nearly 1 million fewer jobs created over the last year than initially reported. Unemployment, although at a historically low level, now sits at 4.3%, its highest since 2021.
Image: Preliminary benchmark payrolls revision for March of each year
These signals of softening outside inflation suggest that the risks of holding rates high may now outweigh the benefits, especially amid political pressure by the Trump Administration.
Source: 3 Comma Capital Research
The mechanics are straightforward: when interest rates fall, bond prices rise. Investors can capture both stable interest income and potential capital gains during a Fed easing cycle. Historically, bonds have delivered strong returns in rate-cutting environments, with duration doing most of the heavy lifting.
At 3 Comma Capital, this macro view has guided our Atlantic Bond Fund positioning. We recently added exposure to the iShares Core GBP Corporate Bond UCITS ETF, which tracks the iBoxx® GBP Liquid Corporates Large Cap Index - a benchmark of the largest and most liquid GBP-denominated investment-grade corporate bonds.
This ETF has 36% exposure to the UK and around 20% exposure to the US, allowing us to diversify across two of the most resilient credit markets and capitalize on the macro view that the Fed is moving toward rate cuts. It distributes interest income quarterly, providing investors a steady stream of cash flow while enhancing the Fund’s credit quality and geographic diversification. At the same time, this allocation reflects our belief that a combination of duration exposure and high-grade corporate credit presents a good risk/reward opportunity.
While no one can predict precisely how steep cuts will be, the evidence - including soft labor data and Fed’s recent tone - points toward fixed income making a strong case for investors seeking income, diversification, and capital preservation.
Adding to the equation, the U.S. bond market is still working through its longest and deepest drawdown on record - now more than 5 years in duration.
Historically, bonds have delivered positive and largely uncorrelated – and in many cases negatively correlated – returns during periods of equity market stress, offering valuable diversification when it mattered most. Across past bond market drawdown events, the average decline has been around -8%, with the current post-COVID inflationary period marking the deepest on record at roughly -17%.
Equities have typically generated positive returns during these bond drawdowns, as they do currently, reinforcing their complementary role in a diversified portfolio.
This prolonged bond market stress has reset yields to the most attractive levels in over a decade. Historically, the end of major bond market drawdowns has been followed by multi-year periods of strong total returns, as falling rates reprice fixed income assets higher.
Yes: it may well be time for bonds. Not as a wholesale abandonment of equities, but as a strategic pivot. Bond allocations now offer asymmetric upside: stable income, potential for capital gains if yields decline, and lower volatility.
At 3 Comma Capital, we are monitoring upcoming inflation data, labor market trends, and Fed communications closely seeking to deliver stable, risk-adjusted returns for our investors during this key macroeconomic transition.
“With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”
— Fed Chair Jerome Powell
This shift raises an important question: why is the Fed now considering easing policy and Is it time to rotate into bonds?
The Case for Easing by the FED
The Fed currently holds its federal funds rate at 4.25%–4.50%, unchanged through five meetings. If you focus just on inflation, it’s hard to see why the Fed would ease. After dropping sharply from its 2022 highs, price growth has not only started to creep up again, but is holding above the Fed's target for more than 2 years now. In August 2025, U.S. inflation was at 2.9%, slightly up from 2.7% in July and obviously above the Fed’s 2% target. Core inflation, which excludes food and energy, was at 3.1% - also too hot for comfort.And yet, here we are — about to get rate cuts.
The reason lies in slowing growth and a softening labor market. GDP grew just 1.4% in the first half of 2025, with the first quarter even shrinking by 0.5% before rebounding in Q2. Labor data is flashing yellow: only 22,000 jobs were added in August, and revisions revealed nearly 1 million fewer jobs created over the last year than initially reported. Unemployment, although at a historically low level, now sits at 4.3%, its highest since 2021.
Image: Preliminary benchmark payrolls revision for March of each year
These signals of softening outside inflation suggest that the risks of holding rates high may now outweigh the benefits, especially amid political pressure by the Trump Administration.
What Past Cycles Tell Us About Bonds
Historically, bond markets tend to perform well when central banks move from tightening to easing. Here’s where the opportunity lies:- When rate cuts loom, long-dated bonds typically appreciate, as yields fall.
- High-quality corporate bonds often benefit as credit spreads tighten.
- Fixed income becomes more attractive relative to equities when equity valuations are elevated and growth is slowing.
Source: 3 Comma Capital Research
The mechanics are straightforward: when interest rates fall, bond prices rise. Investors can capture both stable interest income and potential capital gains during a Fed easing cycle. Historically, bonds have delivered strong returns in rate-cutting environments, with duration doing most of the heavy lifting.
Signals and Risks
While the case for bonds is strengthening, important caveats remain:- Inflation is not yet back at target; the risk of a rebound is real, especially if tariffs, supply chain disruptions, or wages push costs higher.
- The Federal Open Market Committee (FOMC) will want to see consistent evidence of labor market cooling for a sustained period of time.
- There is political pressure on the Fed - easing measures like the recent proposal to relax the Supplementary Leverage Ratio (SLR) suggest increasing influence from Washington. These shifts can introduce uncertainty into bond markets.
Corporate vs. Government Debt: A Diverging Picture
While government debt has surged to record highs both in nominal terms and relative to GDP, many corporations are entering this cycle with more moderate leverage. In several advanced economies, corporate debt-to-GDP ratios have declined since pre-pandemic levels, and investment-grade issuers generally show conservative capital structures. This contrast strengthens the case for high-quality corporate bonds now, especially in a rate-cutting environment.How Investors Might Position
Given this backdrop, we see a compelling case for selective bond allocations:At 3 Comma Capital, this macro view has guided our Atlantic Bond Fund positioning. We recently added exposure to the iShares Core GBP Corporate Bond UCITS ETF, which tracks the iBoxx® GBP Liquid Corporates Large Cap Index - a benchmark of the largest and most liquid GBP-denominated investment-grade corporate bonds.
This ETF has 36% exposure to the UK and around 20% exposure to the US, allowing us to diversify across two of the most resilient credit markets and capitalize on the macro view that the Fed is moving toward rate cuts. It distributes interest income quarterly, providing investors a steady stream of cash flow while enhancing the Fund’s credit quality and geographic diversification. At the same time, this allocation reflects our belief that a combination of duration exposure and high-grade corporate credit presents a good risk/reward opportunity.
Time to Rebalance
The balance between risk and reward is shifting. Equities continue to trade at elevated multiples, while bonds are looking more compelling, particularly if rate cuts materialize and inflation remains under control or falls.While no one can predict precisely how steep cuts will be, the evidence - including soft labor data and Fed’s recent tone - points toward fixed income making a strong case for investors seeking income, diversification, and capital preservation.
Adding to the equation, the U.S. bond market is still working through its longest and deepest drawdown on record - now more than 5 years in duration.
Historically, bonds have delivered positive and largely uncorrelated – and in many cases negatively correlated – returns during periods of equity market stress, offering valuable diversification when it mattered most. Across past bond market drawdown events, the average decline has been around -8%, with the current post-COVID inflationary period marking the deepest on record at roughly -17%.
Equities have typically generated positive returns during these bond drawdowns, as they do currently, reinforcing their complementary role in a diversified portfolio.
This prolonged bond market stress has reset yields to the most attractive levels in over a decade. Historically, the end of major bond market drawdowns has been followed by multi-year periods of strong total returns, as falling rates reprice fixed income assets higher.
Conclusion
The Fed’s pivot toward rate cuts in a world where stocks, gold, and Bitcoin are close to all-time highs may feel counterintuitive, but it presents an attractive setup for fixed income. With nominal Treasury yields near 4.3% and high-quality corporate bonds yielding around 5%, investors can lock in compelling real income while benefiting from potential price appreciation if rates decline.Yes: it may well be time for bonds. Not as a wholesale abandonment of equities, but as a strategic pivot. Bond allocations now offer asymmetric upside: stable income, potential for capital gains if yields decline, and lower volatility.
At 3 Comma Capital, we are monitoring upcoming inflation data, labor market trends, and Fed communications closely seeking to deliver stable, risk-adjusted returns for our investors during this key macroeconomic transition.
 |
Duarte Caldas
Investments Principal
|
With more than 20 years of experience in financial markets, Duarte specialized in the energy area in the last decade, where he had the opportunity to work with the main European Power and Gas institutions at CIMD Group. Previously, he worked as Market Strategist at IG Markets Iberia.
