Asset management firm DoubleLine Capital has indicated it is increasing its allocation to short-duration U.S. Treasuries, based on the view that the Federal Reserve is likely to keep interest rates unchanged this year. This outlook stems from the strong policy credibility that Fed Chair Waller has established in the markets.
Bill Campbell, DoubleLine's Global Sovereign Debt and Emerging Markets Portfolio Manager, noted that current elevated U.S. Treasury yields have already pushed up overall financing costs. He suggested that if upcoming economic data continues to show inflation moderating, these higher market rates could themselves serve to tighten financial conditions, thereby reducing the necessity for the Fed to implement further rate hikes.
Campbell pointed out that since Waller assumed leadership of the Fed, his consistent hawkish messaging has helped the central bank regain market trust. He stated, "Barring the emergence of new inflation risks, this policy credibility itself acts as a form of tightening. We anticipate Waller will maintain rates through 2026."
Since the escalation of tensions in the Middle East, markets have significantly repriced the expected path of Fed policy, leading to a sustained rise in U.S. Treasury yields since late February. Currently, short-term Treasury yields are notably above the Fed's policy rate range of 3.5% to 3.75%.
On Monday, U.S. Treasury prices followed U.K. gilts lower, with yields rising across the curve by 3 to 5 basis points. DoubleLine Capital believes current yield levels are now attractive for bond investors, as the market has already priced in a degree of further rate hike expectations.
The firm argues that if forthcoming economic data provides further evidence of cooling inflation, the likelihood of the Fed holding rates steady will increase, which could then set the stage for a rally in U.S. Treasuries.
Waller has recently reiterated on multiple occasions that returning U.S. inflation to the long-term 2% target remains the Fed's primary objective, a goal that has remained elusive over the past five years. During last week's congressional testimony, he again emphasized that June's unexpectedly lower Consumer Price Index reading does not signify the Fed's inflation-fighting mission is complete.
Following the June inflation data release, interest rate markets had almost fully priced in a 25-basis-point rate hike for the end of this month. However, markets still see potential for rate hikes in September and October, with cumulative expectations for policy tightening by year-end amounting to approximately 34 basis points.
Campbell also commented on the recent escalation of U.S.-Iran tensions, which has driven oil prices higher. He suggested that such price volatility, driven by supply-side factors, should be a reason for the Fed to exercise patience. "The Fed cannot solve a supply shock by raising rates," he said, "especially given that the previous month's supply shock has largely reversed."
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