PGIM Co-CIO of Fixed Income, Greg Peters, says there are three things driving fixed income markets right now: Inflation, The Economy, and What the Fed’s Going to do about it. He also thinks that there’s cca disconnect happening in the bond market, where investors are pricing in rate cuts in the second half of 2023, but overlooking the macroeconomic climate and likely recession that would be required for the Fed to make those rate cuts.

If they are pricing in rates cuts in the back end of this year, and to me, that is, you know, the risk markets are ignoring that if the Fed cuts, that means we are into a recession or a much weaker period.  But the binding constraint continues to be inflation.  And I think we're in a very different environment.  We've been so accustomed to the Fed coming to the rescue, and it's much easier to do that when they're operating below that 2% level, when they're above and they're pretty meaningfully above their degrees of freedom, really, really get much tighter.  So I think the markets are mis calibrate what the Fed can do. 5 And the opposite is also true, David, where if the numbers continue  to assert themselves on the inflation side, there's more work to do. And the markets have been consistently wrong on the level of inflation and what the Fed's response function.