Calamos Fixed Income Suite: Charting a Course through Disruption

Matt Freund, CFA, Christian Brobst, and Chuck Carmody, CFA

Summary Points:

• We expect softer growth and sticker inflation—but not a recession—as the US navigates a period of significant disruption.
• The market is confronting many unknowns, including near-term headwinds from tariffs and the potential tailwinds of changed tax policy and reduced regulation.
• We continue to position the Calamos fixed income funds to be well compensated for the risks they undertake; this includes holding duration positioning generally steady since the start of the year.

Disruption/ dis-ˈrəp-shən / a break or interruption in the normal course or continuation of some activity, process, etc.

In recent decades, it has become fashionable to view disruption as a positive. Disruption breaks expectations. “We pay attention to the things that violate our expectations of the world,” according to author and tech entrepreneur Ben Parr. Technology disruption is generally good, but now we are facing political disruption, which could result in economic disruption. So far, that’s sparking anxiety.

However, despite the headlines, the chance of a recession in 2025 is low. In our view, the most likely path forward is one of softer growth and sticky inflation. In the summary of economic projections released during its March meeting, the Fed supported this view by concurrently increasing its expectations for unemployment and inflation while decreasing its growth estimate.

Even if a recession is unlikely, this scenario presents unique challenges for consumers, business operators, and central banks. The Fed may find itself in an unenviable position where its mandates (low inflation and unemployment) need medicine simultaneously, but the prescription for each is different and contradictory. So, it becomes a balancing act where setting policy requires evaluating which mandate is at greater risk. Price stability is the bedrock upon which a healthy economy is built, according to Chair Powell. But that is easier to say when the job market is healthy. “Stagflation” would significantly increase the risk of a policy mistake and, in turn, the risk of a recession.

The Fed Projects Softer Growth, Stickier Inflation

Source: www.federalreserve.gov, “Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assumptions of projected appropriate monetary policy, March 2025.”

As we discussed in last quarter’s outlook, November’s election results indicated that major shifts in fiscal policy were coming. We also stated that resistance to change would be high, which was an understatement.

There are still as many unknowns as three months ago, except the unknowns may now be less certain. We don’t know whether government agencies will be disbanded or continue to exist in the most efficient form possible. We don’t know where tariffs will land—will they be zero or 200%? We also don’t know the size and timing of tax cuts and investment incentives. Each issue has a staggering range of potential outcomes.

Lastly, the debt ceiling debate will impact rates and liquidity as the process continues through the spring and summer. The high level of uncertainty has led to increased volatility across markets. We expect GDP to show a contraction in the first quarter of the year, driven largely by the import/export balance as companies front-run tariffs, but this should reverse later in the year, helping the economy avoid recession.

Fortunately, companies in the high-yield universe are operating from a position of strength. Fourth-quarter 2024 results show that high-yield leverage improved quarter-over-quarter and is in a range that no one would define as alarming. However, the situation is evolving rapidly, and the level of present uncertainty is not reflected in fourth-quarter results.

Positioning Implications

Our investment process is grounded in fundamental analysis. In periods of extraordinary volatility and uncertainty, a strong management team with a history of navigating cycles and producing results can be the difference between success and failure. An emerging environment characterized by wider credit spreads and lower equity valuations provides a greater margin for error in security selection, but we continue to migrate credit quality higher across strategies as the yield give-up is minimal.

We believe the move to lower interest rates is the market pricing in a lower growth trajectory and the higher probability of a recession. But as discussed, the range of potential outcomes and resulting volatility leaves us maintaining durations close to benchmark across strategies.

As in the prior quarter, our view of more steepness in the yield curve results in Calamos Short-Term Bond Fund having a duration slightly long of benchmark, while that of Calamos Total Return Bond Fund is slightly short of benchmark. In the Calamos High Income Opportunities Fund, where interest-rate sensitivity has a lower impact on returns, the fund is positioned short of benchmark duration.