Markets Signal New Rate Cycle, Not Fiscal Crisis

Global bond markets are pricing a new rate cycle, not a fiscal crisis, according to Ashok Bhatia, CIO and global head of fixed income at Neuberger Berman. The recent hikes by central banks, including the US Federal Reserve, European Central Bank, and Bank of Japan, signal a shift in focus from government deficits to policy rates.

The bond market is reflecting this change with curves flattening in a classic hiking-cycle pattern, where front-end yields are rising faster than the long end. This suggests that markets are anticipating further rate hikes, not a fiscal crisis.

Bhatia notes that the Fed's decision to raise the fed funds rate by 25 basis points to 3.75-4% was expected, but the hawkish undertone and revised dot plot projections indicate a more aggressive stance on inflation. The median 2026 fed funds projection has risen to 4.125%, with 16 of 18 participants expecting at least one more hike this year.

The implications for portfolio positioning are significant, with Bhatia advising investors to revisit credit exposure and consider adding duration on further rate hikes. He suggests anchoring around short to intermediate rates for carry while selectively adding longer-dated corporate exposure in structurally advantaged sectors.