MATT: In the second half of this year, I think we can expect fixed income markets to be still a little bit more choppy as we navigate where we're heading in the economy, the effect of tariffs and so on. Our expectation is that the economy's going to continue to downshift. We expect GDP to end the year on the weaker side, exiting fourth quarter for full-year GDP print somewhere around 50 basis points to 1%, far less than what was expected at the beginning of the year when US exceptionalism was the watchword, and it was a 2% growth outlook.

Where that leaves us from a financial market perspective is that I think. looking at the Treasury curve, there is scope for yields to come down in the front end with the Fed leaning towards the easy side. They're entering this period a little bit unsure where their mandate is going to land, meaning they have dual mandate of full employment and inflation as their two primary mandates.

And they know that both of those are going to be off their targets. They just don't know by how much. I think they'll lean towards their labor mandate. And as we're already starting to see weakness in the labor markets, as that persists, they'll be able to look at inflation and say, it's somewhat transitory, which is a dangerous word. They'll still lean towards that and then probably cut two or three times.

MATT: we are very sanguine about the credit markets. We still think the risk premium is positive, and it's worth collecting that carry. We see a lot of opportunities on a bottom-up security selection basis.

The way we define the risk premium is the observed spread that you're paid in the market less the amount of losses that you could be exposed to over, say, the next 12 months, and those losses are related to downgrades that a credit might with go through or even defaults in the case of a lower quality bond.

When we look at it through that prism, the risk premium is actually relatively priced, I would say, fairly in this – it's positive. And I also think this is a relatively benign loss environment, so which is to say that even if we ran into some weaker economic times, I do not expect losses to accelerate very significantly.

Let's take a look at the high- yield market, for example. We're estimating losses to be somewhere around a 2% of your return over the next, say, 12 months, with an upper edge of maybe 3% if you end up in a weaker credit environment, or weaker economic environment. Meanwhile, spreads are running somewhere north of 3%. 

So you can see you're getting a decent amount of risk premium. So a pickup above and beyond those losses. That, relative to history where we are in this type of environment, is fairly priced.

MATT: There are structural factors, demographics, security issues out there that are going to keep inflation sort of in the system and with a volatility around it associated with the business cycle. We're at the bottoming level for inflation right now cyclically. But structurally, that's where I think we're going to be.

And a lot of that ends up in the fiscal deficit through entitlements, defense spending, and other factors. We’re running an unsustainably high deficit. Washington, DC is not providing a remedy for that, reducing it to a more realistic level, say, 3% deficit. And it seems like taxpayers don't want to pay it as usual.

So the tax that investors can get in return, or the alternative tax, is inflation.

So how do we deal with that? So where we're leaning in, from a cyclical perspective, with the Fed likely to be leaning towards the easy side and economic growth weakening and the probability of recession higher, you say, well, I want to be longer duration, just like we do historically say, or I want to push out, but I worry about these fiscal dynamics. 

Where I think the risk factor is mostly is in the long end of the Treasury curve. It has to do with supply and demand out there. And I think that in, my opinion, you're not getting paid for that risk at today's level, even though the yields have crept up to high fours, five. 

I think you're at risk of having more downside potentially in that. And I just don't want to take that risk factor in that long end. So I think that five- to seven-year part of the curve is a better way to take that duration risk.

MATT: There's been a lot of questions about the US dollar and its role as a reserve currency in the world. And we're not suggesting that the dollar is at risk of losing its status as a reserve currency. And even in the Treasury market side, where people have been worried about investors buying treasuries, foreign investors, we still think that old acronym, TINA, There Is No Alternative, does apply to the US Treasury market. There's nothing that can replace it in terms of the size, the depth, and even the income that's associated with it. So we think that people will still show up and buy it.