Why Neuberger likes what it's seeing on rates, inflation and AI spend

"We have a high conviction view that's anchoring a lot of our investment thesis that core inflation will be contained. Headline will be volatile given the direction of oil in a given day and the conflict in Iran, but limited pass through into core."

There are three core drivers of that thesis - disinflation across shelter, wage growth and core goods - and the upshot is that markets may be overestimating the chances of US rate hikes. 

"The construct of those three things means that the Fed can stay on hold here if that data is what plays out going forward," says Grotzinger. "And the hiking that's priced in the market can maybe be taken out as we push forward through the second half of this year."

"For that view on where the macro data is headed, we think that there's value in US Treasuries, but belly to short-dated type of maturities," says Grotzinger.

"The market right now, in something like a 2-year Treasury, is pricing for two hikes. So you could say that US Treasuries are cheap if you think that the Fed's going to be on hold and will not be pursuing a renewed hiking cycle."

Government duration has actually been a detractor for Neuberger in 2026, as US Treasury yields have risen and rate hikes are priced in, but represents an opportunity for investors with the requisite patience and conviction to see it through. 

"The challenge is building into that position in a contrarian fashion and risk-managing it, understanding that there can be some mark to market downside in the near term," says Grotzinger.

The nature of the opportunity means you need to be early.

"We're okay with that contrarian positioning," he says. "The way typically we've seen in the last few years in particular that government bond opportunities exist is you can build into those on a contrarian fashion and adding. And when you get data that's supporting the rallies in government bonds, they're often sharp and fast. It's often too late to be adding after you've observed the data."

To counterbalance that trade, Gotzinger says Neuberger is looking in other bond markets where the opposite thesis applies.

"We like complementing some of the government bond exposure with non-US opportunities that just have different reaction functions and drivers to them," he says.

"In particular, in Europe, we see the construct of growth weaker than what the market's estimating. The ECB has hiked. And so we think there's some opportunities to own a bit longer duration in European bonds and a similar kind of thesis in Canada right now."

On the credit side, he says it's about finding the appropriate balance and sizing. 

"We think credit's a good place to invest in portfolios. In spite of richer valuations, there's good income, there's good carry. And so it's more of a portfolio management exercise of ensuring the adequate sizing of that, which is moderate risk in credit versus an aggressive stance given the valuations that we see today."

AI as a fixed income story

AI has been the dominant story in equities, but Grotzinger has said it's increasingly a fixed income story as AI hyperscalers have issued huge amounts of investment-grade debt. 

"We've seen a huge deluge of supply coming to the market from these issuers," says Grotzinger. "And what's driving that are the constant revisions upwards of capital expenditure and really financing a healthy proportion of that from debt issuance."

But the market has begun to question whether there will be enough return on investment to justify the spend, and that uncertainty weighs on the relative attractiveness of that debt. 

"The question for us as a lender, if we want to participate in their bonds, is are we being adequately rewarded for those tail risks and those unknown factors looking forward? The start of this year, I'd say no. It wasn't clear that these hyperscaler investment grade bonds were cheap. They weren't cheap to securitise. They weren't cheap compared to strong BB credit."

That is slowly changing, and Neuberger now sees an opportunity in the space. 

"But we've seen a pretty big backup in spreads over the month of July in particular," says Grotzinger. "That's created some better value here that's enticing for us and we've started entering some exposure into the portfolio in hyperscaler debt."

Duration, duration, duration

The transition from the zero interest rate environment that has defined the Covid era has been one of the bigger opportunities for returns in the Neuberger Berman Strategic Income Fund, says Grotzinger.

"There's been a renewed investment opportunity given the volatility - given the market's back and forth on what the central banks are going to do and how they're pricing that - to trade in government bonds, to have those exposures on an active basis, and to exploit extremes in pricing that the market may take at a given point of view." 

"Since COVID and really since 2022 when the Fed started raising rates, we've seen that as a nice alpha source to complement what we're doing in credit."

While it has been a detractor in 2026 as Neuberger builds into its contrarian position on US rates, it has been a great driver of returns in recent years.

"In some years, 30 to 40% of the total return is coming from active trading of government bond duration in the portfolio."

It's also why Neuberger has launched a dedicated Short Duration fund that is looking to focus in on the opportunity at the front end of the yield curve. 

"The short duration income fund does everything that strategic income does in sector rotation and in security selection as an alpha driver," says Grotzinger. "But in duration, we're exclusively only focused on the front end of yield curves." 

It's targeting a constant duration of two years, which has seen interest from advisers looking for that stability. 

"They like the credit exposures we have. They like our ability to select the right bonds, but they want to keep the duration in a constant short duration structure. So it's just appealing to a different demand in the market and how advisers are building client portfolios."

Managed Fund

Neuberger Berman Strategic Income Fund

Global Fixed Income

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Managed Fund

Neuberger Short Duration Income Fund

Global Fixed Income

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