Rate hikes implications

The U.S. Fixed income market isn't just one number. It's a ladder, and not only in terms of maturity, but also in terms of credit quality, liquidity and complexity, and right now each rung is telling a different story:

Take q look a the chart below; there is nearly a 5-point spread between cash and private credit — the widest gap tells you how much the market is charging for duration, credit risk, and illiquidity today.

Money market yields track short-term policy rates almost one-for-one. If the Fed pushes through additional hikes, that 3.5% floor moves higher — and floors don't move in isolation. They pull everything above them along, but the dynamics of each one are different:

1- Treasuries reprice as the risk-free rate resets higher across the curve. When yields go up, prices go down as coupons are mostly fixed.

2- IG and HY credit spreads sit on top of that higher base, so all-in yields climb even if spreads stay flat. Coupons are also mostly fixed, but they’re subject to rates risk and credit risk, with spreads widening on credit events.

3- Private credit — much of it has floating-rate coupons, priced at a margin over SOFR or similar benchmarks, which adjusts almost mechanically as base rates rise. They should become more attractive as rate go up, but they also become riskier, as some companies cannot bear higher interest payments.

So a hike doesn't just make cash pay more. It can quietly re-rate the entire fixed income stack.

Why this matters for allocators:

The question isn't just "what yield am I getting today" — it's "am I being paid enough to hold this asset instead of the one below it on the ladder." At 8.3%, private credit looks attractive relative to cash's 3.5%. But if rates keep climbing and money market funds start paying 4.5%+, even if the gap holds, the calculus of stepping out on the risk curve changes with it.

Rate path assumptions aren't just a macro debate. They flow directly into portfolio construction, cash allocation, and how much illiquidity and credit risk actually makes sense to hold right now.

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