Whether it’s public demands for bigger rate cuts or President Donald Trump accusing Federal Reserve governor Lisa Cook of mortgage fraud, this is a period of heightened political scrutiny on the central bank.
Kathy Jones, pictured, chief fixed income strategist at Charles Schwab, said she has never witnessed such overt pressure from the White House on the Fed. “I think this stands out, and I've been doing this a long time,” she told InvestmentNews at the Schwab IMPACT event in Denver, Colorado, on the same day the President reportedly called Fed chair Jerome Powell a “nincompoop.”
“Every administration wants the Fed to do their bidding, and obviously behind the scenes they're often applying some pressure, but this is really overt and much stronger and louder than anything we've seen in the past.”
Despite this and the ongoing government shutdown, which has limited the amount of available date, Jones had a clear message for worried advisors: when it comes to the bond market, it doesn’t really matter. “The bond market is doing its own thing, as it always has,” she insisted.
She pointed to the fact that, year to date, every sub-asset class is demonstrating positive returns and that she expects that to continue. Bottom line? Fixed income is doing what it’s supposed to do for investors.
She said: “If you have a good strong core portfolio, meaning higher credit quality and intermediate term duration, you're delivering nice income, clipping those coupons, and getting some added capital gains for your clients. We think that continues into 2026. We think 2026 will be another positive year. So, it's the no drama part of the portfolio. We've got plenty of drama elsewhere. Enjoy the ride is what I would say.”
When it comes to specific opportunities, Jones pointed to Treasury Inflation Protected Securities (TIPS), investment grade corporate bonds, and municipal bonds. She admited that with investment grade corporates, the spread versus Treasury is pretty tight but that the fundamentals are still good. Conversely, Jones urged caution in the leveraged loan market. “The credit quality is quite low to start with and we're starting to see default rates pick up. There's some fuzzy financing and part of that market that can backfire on you in stressful times. So we have an upper credit quality bias.”
Advisors are understandably anxious about the Fed, policy uncertainty, debt and deficits, tariffs, and labor market dynamics. Just like the majorty of people, they have been left scratching their head at the economy given the lack of data. But Jones urged them to stick to the basics and remember that bonds are acting like bonds and not doing anything strange.
“This means the market is trying to find some sort of equilibrium here. You know, 4% on the 10-year, somewhere in the threes on the Fed funds rate; that's actually long-term kind of normal. We're concerned about fiscal policy and would be a little cautious on very long-term bonds - because of that, we think there's room for those yields to go up a bit – but we're not concerned about the intermediate term. We think that that outlook is good. Use bonds for what they're designed for. They're not designed to deliver drama.”
One of the themes of the conference has been diversifying from the US and finding value in international markets, particularly given the weakening dollar. International bonds have outperformed for the first time in a decade, thanks in part to the green back sliding 10-11%.
However, Jones cautioned that the dollar is unlikely to drop a similar amount in 2026 and to calculate how much extra yield you're giving up versus how much currency gain you hope to achieve. Emerging markets, in particular, had a big gain this year and if the Fed eases, 2026 could mean another one, albeit in a potentially more volatile environment than the developed markets.
All that being said, for most U.S.-based investors, Jones recommends a U.S.-centric approach. “We're not big fans of overweighting some of the what we call more aggressive income areas of the market. If you have U.S. based, U.S. dollar based investors, we think most of their portfolio should be in U.S. dollar based investments, and then opportunistically look at international. But that can move very quickly. It can be hard to navigate.
"Those are different smaller markets, generally speaking, and very hard to navigate at times because you've got many different levers that are being pulled. Oftentimes advisors will tend to use a mutual fund and an advisor, which I think makes sense because they have feet on the ground and they can navigate those markets better.”
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