Fixed income faces the greatest risk as the labor market remains resilient, says Pinebook Capital founder

A senior macro strategist has warned that fixed income markets are the most vulnerable asset class in the current economic cycle amid uncertainty tied to geopolitical tensions in the Middle East. David Cervantes, founder of Pinebook Capital, said in an interview with David Lin published on April 13 that bonds—especially longer-duration government debt—are the segment most exposed to downside.

Cause: Labor market stability and Fed communication risk

Cervantes’ outlook is based on the expectation that the labor market will remain stable, which he said reduces the likelihood of near-term monetary easing. He pointed to unemployment holding around 4.3%, arguing that economic conditions are firm enough to prevent the Federal Reserve from cutting interest rates this year.

He also suggested that even if policymakers ultimately leave rates unchanged, the Fed could shift its communication later in the year toward a more hawkish stance. “The asset that’s most at risk is fixed income, as long as the labor market holds up. I think late in the year, I’m not calling for a hike, but the Fed will start communicating and start leaning hawkish. I would say bonds are more likely to suffer than any other asset class out there,” he said.

Development: AI investment as a buffer

A key support for Cervantes’ view is continued investment related to artificial intelligence. He estimated that AI-related spending is contributing roughly 2% to GDP. In his assessment, this spending is acting as a buffer for the broader economy by reinforcing business activity and reducing the risk of a sharp downturn in employment.

“There’s a tailwind to the economy. That’s the AI spend. That is a huge buffer and provides resiliency to the business cycle. As long as you’ve got the AI trade going on, I find it really hard to make an argument that the labor market’s going to fall apart and therefore the Fed will be incentivized or motivated to cut this year. I just don’t see it happening,” he added.

Data and inflation: Tightening bias remains a concern

While Cervantes noted that policymakers may look through temporary oil-related shocks, he said inflationary pressures beyond energy remain a concern. He cited rising costs in goods and services, including travel, as factors feeding into core inflation and increasing the likelihood that the central bank maintains a tightening bias.

Impact: Elevated yields and pressure on bond prices

Against this backdrop, Cervantes said there is limited justification for rate cuts in the near term. He warned that bond markets—particularly the 10-year segment—face heightened risk, as yields could remain elevated or move higher, which would put downward pressure on bond prices.