Baird Fixed Income Insights: Convexity Pulse
Jul 13, 2026 · 24 min · 7 segments
In this week's Convexity Pulse, Kirill Krylov and Steven Scheerer discuss why today's mortgage market continues to defy simple narratives. They examine how shifting Fed expectations and persistent…
Kirill KrylovHost
Steven ScheererHost
Fortunately, today's discussion involves assets with considerably more predictable cash flows.
Stephen, if you had asked almost anyone at the beginning of this year where the Fed would end this year, which is 2026 in case you forgot, the answer would have been pretty consistent.
Most investors expected, well, at least two rate cuts and quite a few thought three were entirely possible.
The market has largely abandoned those expected cuts and in many cases is now pricing a possibility of one or even two red hikes by the year end.
So the current market and January's forecasts are never ever getting back together? No.
After another, we have had, well, let's see, pandemic, extraordinary fiscal stimulus, inflation, the marriage of Stephen Scheer's son, shifting trading policy, persistent geopolitical uncertainty, and now renewed conflict in the Middle East.
Each event has complicated the outlook, making it increasingly difficult to identify what is normal, quote-unquote, economic condition actually look
Yeah, I think that is the key point, minus maybe the family marriage there, but...
Investors naturally want to estimate trend growth, trend inflation, or the natural level of interest rates.
But it's incredibly difficult to do that when the economy rarely gets the chance to operate under quote-unquote stable conditions.
Every time one source of uncertainty begins to fade, another one seems to emerge.
Fed funds futures lean towards a more restrictive policy path, while options markets continue to show meaningful demand for protection against both higher and lower rates.
In other words, sophisticated investors aren't simply debating when the Fed moves.
from our perspective, Stephen, that uncertainty argues against making aggressive policy forecasts.
Fortunately, today's discussion involves assets with considerably more predictable cash flows.
Stephen, if you had asked almost anyone at the beginning of this year where the Fed would end this year, which is 2026 in case you forgot, the answer would have been pretty consistent.
Most investors expected, well, at least two rate cuts and quite a few thought three were entirely possible.
The market has largely abandoned those expected cuts and in many cases is now pricing a possibility of one or even two red hikes by the year end.
So the current market and January's forecasts are never ever getting back together? No.
After another, we have had, well, let's see, pandemic, extraordinary fiscal stimulus, inflation, the marriage of Stephen Scheer's son, shifting trading policy, persistent geopolitical uncertainty, and now renewed conflict in the Middle East.
Each event has complicated the outlook, making it increasingly difficult to identify what is normal, quote-unquote, economic condition actually look
Yeah, I think that is the key point, minus maybe the family marriage there, but...
Investors naturally want to estimate trend growth, trend inflation, or the natural level of interest rates.
But it's incredibly difficult to do that when the economy rarely gets the chance to operate under quote-unquote stable conditions.
Every time one source of uncertainty begins to fade, another one seems to emerge.
Fed funds futures lean towards a more restrictive policy path, while options markets continue to show meaningful demand for protection against both higher and lower rates.
In other words, sophisticated investors aren't simply debating when the Fed moves.
from our perspective, Stephen, that uncertainty argues against making aggressive policy forecasts.
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