Institutional Investor Insights

The Fed has resumed hiking, but a prolonged tightening cycle is not inevitable - Higher policy rates are lifting bond yields and debt-service costs and may slow improving credit fundamentals. Markets are pricing 3 hikes by April, but inflation partly reflects energy and other supply pressures rather than broad-based overheating.⁵ An extended hiking campaign may not be warranted.

Higher yields favor income over a large directional duration bet - Attractive starting yields provide meaningful carry and a cushion against further rate increases, but persistent inflation and uncertainty around the Fed path favor flexible curve positioning and selective duration exposure rather than a broad long-duration bet.

Strong earnings are helping equities absorb higher yields - Resilient earnings growth, particularly among AI-linked companies, is helping offset the valuation pressure that would normally come from higher discount rates. However, investors need to dynamically manage potential volatility around the AI buildout.

Higher yields raise the bar for equity selection, reinforce case for Quality - Higher discount rates put greater pressure on valuations, increasing the importance of durable earnings growth, strong cash flows and healthy balance sheets. AI-linked names generate earnings which can outpace the valuation headwind, while small-caps and rate-sensitive companies face greater pressure.

EM equities are attractive, but selectivity matters after rally - Strong earnings and AI-related demand continue to support EM equities, particularly Korea and Taiwan, but sharp gains have increased concentration and momentum risk in North Asia. This favors broader, selective EM exposure rather than simply adding to the recent winners.

Private credit has become more selectively attractive - The combination of higher base rates and wider spreads has improved prospective yields, with gross asset yield expectations rising from approximately 8.5% at the beginning of the year to nearly 10% today.⁶ Newly originated transactions are also offering higher yields alongside improved documentation, tighter covenant packages, and greater downside protection.

Private credit’s opportunity set is expanding beyond traditional middle-market lending - Increasingly, the opportunity involves more direct and nuanced interactions with corporate borrowers, including financing needs associated with the AI buildout, asset-heavy corporations seeking tailored financing solutions, and pre-IPO companies seeking liquidity.

Greater dispersion amplifies the value of portfolio diversification - Higher yields, concentrated equity leadership and greater macro dispersion strengthen the case for combining equity and credit exposure with differentiated return sources such as commodities, gold and flexible multi-asset strategies.