Bond market volatility persists as Fed holds rates

The U.S. bond market remains volatile, and concerns over economic growth and fiscal policy are increasingly weighing on investor sentiment, says Jeffrey Mayberry, fixed income asset allocation strategist and portfolio manager with DoubleLine Capital.

In a conversation for the Advisor to Go podcast on March 3, Mayberry said a recent rally in bonds was driven by weaker economic data, but a broader trend of higher interest rates will persist.

“Up until about the middle of February, the U.S. bond market has been in a pretty significant sell-off in terms of interest rates,” he said. “Since mid-February, there’s been some growing growth concerns in the U.S. Consumer confidence has come down, and there is a little bit more of a concern … that the U.S. growth is not going to be as robust as it was in 2024.”

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

Despite recent softness, Mayberry expects higher long-term interest rates due to growing concerns about the U.S. deficit. 

“The bond market will become much more concerned with the growing budget deficit and really put upward pressure on interest rates,” he said.

The U.S. Federal Reserve remains committed to bringing inflation down to its 2% core personal consumption expenditures target, he said, but still hovering at 2.5%, inflation remains sticky. This means the central bank is likely to maintain its higher-for-longer rate stance.

“The Fed is going to remain data dependent, they’re going to keep rates higher for longer, because they really need to get inflation down to 2%,” Mayberry said.

Meanwhile, markets are pricing in two to three Fed rate cuts in 2025, with the first expected in June. However, this timeline is dependent on inflation trends. 

“If inflation comes down faster, then that will mean that the Fed can cut rates faster. If inflation remains higher, then they will stay higher for longer,” he said.

Compared to the U.S., Canada’s bond market is in a more favourable position. The Bank of Canada has cut rates more aggressively than the Fed and is expected to continue doing so, creating an interest rate differential that could make Canadian fixed-income assets more attractive to investors.

“The Canadian fixed-income market is in a very interesting place today,” Mayberry said. “Certainly the geopolitical risks are at very high levels. It depends on how the energy markets and the commodity markets are going to react to what is happening in the U.S., and correspondingly, what the Canadian government is going to do.”

For fixed-income investors, Mayberry sees opportunities in commercial mortgage-backed securities and agency mortgage-backed securities, particularly in sectors with wider spreads that could tighten.

“There are pockets of opportunity, places where if you have a relatively wider spread, you have the potential for further spread tightening, which can increase your prices and lead to a higher total return,” he said.

Agency mortgage-backed securities, which have an implicit U.S. government guarantee, are particularly attractive. 

“Right now we very much like the agency mortgage space. Now, spreads are still relatively wide. Banks haven’t come in to buy agency mortgage-backed securities as much as they were pre-Covid,” he said.

Beyond U.S. political uncertainty, Mayberry said slowing economic growth is another risk. Consumer confidence is declining, and weaker economic data suggests potential headwinds ahead.

“When we look at something like future inflation expectations, … overall, when you look at the median data point, that inflation is trending to be higher. So I think you could get the dreaded stagflation scenario, where you have higher inflation, slower growth,” Mayberry said.

Although stagflation remains a low-probability event, it has gained more attention in early 2025. Meanwhile, he said the “no-landing” scenario — where the U.S. economy continues to grow without a slowdown — seems increasingly unlikely.

“The no-landing scenario doesn’t seem as highly probable today, at the beginning of March, as it did middle-end of 2024. That seemed like a high-probability event,” Mayberry said. “We think that over the first half of the year we’re still likely to cruise along. It’s the second half of the year that we are starting to see some potential speed bumps.”