Fixed income investors are navigating a changed landscape compared with years ago; bonds remain a vital portfolio component, though new risks have emerged.
That was a high-level takeaway of the CIO Outlook Interview, which took place Tuesday morning at the Fixed Income Leaders Summit in Boston. Laura Cooper, global investment strategist & head of macro credit at Nuveen, interviewed Lori Heinel, global CIO, at State Street Investment Management.
Cooper opened the interview by noting the fixed income market seems to have settled into. a backdrop of persistent exogenous shocks dating back to the COVID pandemic, which have included tariffs, wars in the Middle East, stop-and-start peace deals, and energy price spikes.
Heinel cited two overarching dimensions that have influenced market evolution: one, market participants are focusing more on policy than on markets themselves, and two, a shift from a rules-based dynamic to a power-based dynamic, which involves more state activism and is less predictable. “There’s a notion of power as an anchoring force, rather than rules,” Heinel said.
There is an ongoing perception of fiscal profligacy on the part of governments, which raises the risk of inflationary shocks. While this has yet to come to pass, Heinel said some of the rise in real yields in recent years may reflect some notion of credit risk in the risk-free rate.
The US Federal Reserve meets this week to update its course on interest rates; Heinel expects the Fed to hold rates steady. She expects to lower rates in early 2027 as a response to economic weakness; that forecast was revised form earlier this year, when State Street was expecting rate cuts in 2H 2026.
Regarding the role of bonds in an investment portfolio, Heinel said the asset class provides income, tail-risk hedge, and diversification benefits, though that hasn’t been as reliable recently. The bond universe has grown more eclectic, with private credit and real estate among alternative options for investors to consider.
To the question of risks to the credit market, Heinel cited the risk of the AI hyperscaler virtuous cycle – more capex leading to more earnings – coming undone, as well as the risk of lower-cost AI technology from other parts of the world becoming “good enough.”
“When is next incremental dollar bad money after good?” Heinel asked about the market-leading sector. She said it’s not the case yet, but there are signs that it’s coming.
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