Calamos Fixed Income Suite: Secure in Our Footing on a Steepening Yield Curve

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

Summary Points:

• The Federal Reserve finds itself buffeted by crosscurrents, including reduced inflation pressure and sustained challenges from the Oval Office.
• The US labor market has so far avoided worst-case scenarios, and we expect consumer activity to sustain the US economy over the near term.
• A recession is unlikely in 2025; our base case is for softening growth and moderating but still-sticky inflation.
• As spreads have compressed, we’ve been able to migrate the credit qualities of the funds higher, while still maintaining attractive levels of income.

With trade and tax details still unfinished, we believe the Fed is somewhere between a rock and a hard place. The central bank already has ample justification to continue the rate-cutting cycle, given two below-expectation inflation prints, several short-term rolling inflation measures under 2%, and increasing jobless claims.

Undoubtedly, the Oval Office’s demands for rate cuts are part of the challenge. If the Fed is perceived to be cutting rates solely in response to political pressure, we believe it would have the unintended effects of higher long-term rates and a weakening dollar because markets are likely to interpret political influence on policy as long-term inflationary. However, delays in making further cuts could intensify the softening of the economy.

Although employment conditions are not as robust as they once were, the job market has generally avoided the worst-case scenarios that many thought would follow DOGE’s efforts to reduce the Federal workforce and the administration’s deportation efforts. Jobless claims have increased marginally, and the unemployment rate has been stable as the labor force slowly shrinks due to changes in federal immigration enforcement. Labor hoarding still seems to be the preferred strategy for most corporate management teams.

Even so, consumer activity has been resilient, and so long as the labor picture remains generally stable, we believe the economy can avoid recession over the balance of 2025. There are stressors for many subgroups of consumers, to be sure. The recent resumption of student loan payment requirements by the Department of Education is notable due to its impact on about 8 million borrowers. Many saw their credit scores reduced, making additional credit prohibitively expensive. But is it enough to tip the economy into a recession? We think it’s unlikely, particularly given indications that some form of the stimulus-laden tax bill will be passed this summer.

While we have been surprised by the benign inflation reports of the past two months, our base-case expectation continues to be an environment of softening growth and sticky inflation. The conflict in the Middle East could change things, and the impact of tariffs is still unknown. Still, gasoline and food prices have remained stable over the past quarter, and it is possible the US economy may avoid the higher inflation component we previously forecasted.

Credit markets continue to express confidence in the economy and borrowers’ ability to repay debt. High yield spreads, closing right around +300 basis points, are near the tightest level since the President’s tariff “Liberation Day,” and investment-grade spreads are trading within 10 basis points of cycle tights (tight spreads = high prices). As investors chase new corporate debt offerings, the market continues to benefit from a very supportive technical backdrop.

Positioning Implications

We believe the yield curve’s recent steepening trend will continue. Fiscal concerns, increased term premia, and fear of tariff-related inflation could keep long-term rates elevated and moving higher. We believe shorter duration rates—which are more heavily influenced by monetary policy—will keep moving lower as core inflation continues to moderate and the Fed becomes comfortable with more accommodative policy.

Based on these expectations, we have positioned Calamos Short-Term Bond Fund with a duration longer than its benchmark and Calamos Total Return Bond Fund with a duration slightly shorter than its benchmark. In the Calamos High Income Opportunities Fund, where interest-rate sensitivity has a lower impact on returns, the fund is positioned short of its benchmark’s duration.

Trading ranges in credit spreads should hold as long as technical factors remain supportive. Nevertheless, spread compression across rating categories has allowed the team to migrate credit quality higher across strategies in recent months without sacrificing too much in the way of income, and we will continue to position defensively until relative value opportunities to move down in credit quality improve.