DoubleLine Capital stated that given Federal Reserve Chair Volcker has established strong policy credibility in the market, the Fed is likely to hold rates steady this year, prompting the firm to increase its allocation to short-duration U.S. Treasuries.
Bill Campbell, DoubleLine’s Global Sovereign and Emerging Markets Portfolio Manager, noted that current elevated U.S. Treasury yields have already pushed up overall financing costs. If upcoming economic data shows further disinflation, the higher market rates themselves could tighten financial conditions sufficiently, reducing the need for the Fed to hike rates further.
Campbell pointed out that since Volcker took the helm at the Fed, his consistent hawkish signals have helped the central bank regain market trust. He stated, “In the absence of new inflation risks, this policy credibility itself acts as a form of tightening, and we expect Volcker to keep rates unchanged through 2026.”
Since the escalation of tensions in the Middle East, markets have significantly repriced the Fed’s policy path, driving U.S. Treasury yields steadily higher since late February. Currently, short-end Treasury yields are notably above the Fed’s policy rate range of 3.5% to 3.75%.
On Monday, U.S. Treasury prices weakened in line with UK gilts, pushing yields across the curve up by 3 to 5 basis points.
DoubleLine believes that current yield levels have become attractive for bond investors, as markets have already priced in some degree of additional rate hikes. Should forthcoming economic data show further signs of cooling inflation, the likelihood of the Fed holding rates steady will increase, potentially setting the stage for a rally in U.S. Treasuries.
Volcker has recently emphasized repeatedly that bringing U.S. inflation back down to the long-term 2% target remains the Fed’s top priority—a goal that has remained elusive over the past five years. At last week’s congressional hearing, he reiterated that while June’s consumer price index came in lower than expected, it does not mean the Fed has completed its anti-inflation mission.
Following the release of June’s inflation data, U.S. interest rate markets have almost fully priced in a 25-basis-point rate hike by the end of this month. However, markets still anticipate possible rate increases in September and October, with approximately 34 basis points of cumulative tightening priced in by year-end.
Campbell also noted that the recent escalation in U.S.-Iran tensions has driven oil prices higher, but such supply-driven price volatility should instead reinforce the Fed’s case for patience. “The Fed cannot solve supply shocks through rate hikes—especially when the prior month’s supply shock has largely reversed itself.”
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