Spread versus equities: why Federated Hermes sees one decision where the consensus counts two
A Live conversation with the 2026 Fixed Income winner
This interview took place as a live conversation on July 1, 2026. What follows is a written synthesis.
Steve Chiavarone doesn’t open a conversation about tactical asset allocation with the latest data print or the next rate meeting. He opens with a question most of the 72 asset managers in the Asset Allocation Consensus skip: what long-term regime are we actually in?
“We ask two longer-term questions before we ever analyze what’s happening in the market over a short period of time. The first one is: what secular regime are we in? And the second is: what is the right framework with which to think about this environment? Then we look at the specifics, and we ask: what’s different from the framework?”
Steve Chiavarone, Deputy CIO Equities, Federated Hermes
That ordering is not incidental. Where many asset managers start from the short-term signal and reason forward from there, Federated Hermes sets out the regime first and only then tests the present against it. It’s a framework, not a forecast, and that distinction explains much of why the firm was both nominated for the Asset Allocation Award and won the Fixed Income Award this year.
Secular bull, secular bear
The framework itself is simple to sketch, but its edges are sharp. Equity markets, in Chiavarone’s view, move up or sideways over long stretches, never structurally down: a diversified market doesn’t set lower lows over a ten-year horizon. A secular bear, then, isn’t necessarily a large decline but the inability to make new all-time highs. The 1999–2013 period is the textbook case: two 50% drawdowns, but the real pain was thirteen years of no return for anyone who had bought at the top.
“You’ll sit and you’ll be 5, 7, 10, 13, 20 years out and have made no money in the market if you had bought at the old peak. And that’s really where you create the skepticism that then allows you to build the case for bull.”
Steve Chiavarone, Federated Hermes
A secular bull, Chiavarone argues, needs two ingredients: upward pressure on earnings through technology, and upward pressure on multiples through demographics. The current bull, born in 2013, is fed by AI, cloud and robotics, a trend Federated Hermes flagged as early as 2015, and by millennials as the largest generation ever, who start investing later and therefore need higher returns. As long as that framework holds, the team buys dips rather than sells rallies. The standard equity overweight sits between 4 and 6%, and the team is comfortable in the upper half of that range.
The approach was tested during COVID. Federated Hermes asked itself two questions: does the pandemic accelerate the technological revolution, or disrupt it? And does it accelerate the millennial demographic trend? The answer to both was yes, cloud adoption and remote work took off, and the housing market and wealth accumulation of younger investors accelerated. On that basis, the team expected a decline of no more than 30 to 35%. It came in at exactly 34%, followed by the recovery to new all-time highs the team had anticipated.
One detail from that same period shows how hard it is to keep a framework like this uncontaminated: team members based in New York turned out to hold a noticeably gloomier view of the economy than colleagues elsewhere in the country. A reminder that even seasoned strategists aren’t immune to the bias local experience can introduce into macro decision-making.
One decision, told twice
The underweight in EM debt and high yield is not a credit call, Chiavarone stresses, it isn’t about default risk or a macro disaster scenario. It’s a spread argument: too little compensation for how far out the risk curve you have to go. And once you conclude that compensation isn’t there, the risk budget has to go somewhere else.
Federated Hermes chooses to put that budget into equities, not as a separate decision, but as the second half of the same underlying call.
“Whether it’s EM debt or high yield, you’re going quite a ways out the risk curve within fixed income and there’s just not as much spread available. So what we’ve chosen is: rather than go out to the riskiest parts of the fixed income spectrum, you’re better off going into equities.”
Steve Chiavarone, Federated Hermes
That is arguably the most distinctive substantive observation from the conversation: the underweight in emerging-market debt and the overweight in equities read as two separate lines in a report, but in the decision-making they are one and the same judgment about where risk gets paid best. One nuance: Federated Hermes carries structural overweights in EM bonds in specific funds within the multi-asset suite, which also limits how far the tactical underweight can go in practice.
On the rates side, a third element enters the picture. The committee recently shortened duration, implying an expectation of higher long rates and lower bond prices. The reasoning: the market overestimates the odds of further rate hikes. Chiavarone instead expects a twist steepener, short rates falling once the market realizes hikes aren’t coming, and long rates rising because the United States, in his view, is the next major investment hub.
“We think that short rates will actually come down as the market realizes that hikes are not forthcoming. Meanwhile, the center of the United States right now is the next hot emerging market, that’s where the data center activity is, that’s where the investment is happening. So long rates will go up. A healthy 10-year bond yield in the United States is closer to 5%.”
Steve Chiavarone, Federated Hermes
With that metaphor he places the US rates market in the same mental framework as the EM debt position: capital seeks out wherever growth and return meet, whether that’s an emerging market or the American data-center boom. A 10-year yield closer to 5%, alongside structural inflation of 2.5 to 3%, is in this reading not a risk but a confirmation of the scenario.
Twenty years of trust as a decision-making edge
Behind the substantive calls sits a decision-making structure that makes the framework operational: a three-tier committee system covering liquidity, fixed income and equities, topped by a Macro PRISM Committee that sets the official house view every six weeks, in step with the Fed cycle. In cases of persistent disagreement or acute situations, a team member can “ask for the ball”, claiming the decision on conviction. During COVID, it was Chiavarone who asked for the ball and convinced CIO Stephen Auth to go along with the bull case. In 2023 the roles were reversed exactly: recession fear was at that point close to 100% consensus among Bloomberg strategists, and it was Auth who asked Chiavarone to fall in line with the non-recession view. Chiavarone did, and it turned out to be the right call. For Chiavarone, that back-and-forth is the proof the system works: it isn’t seniority that claims the ball, but whoever holds the strongest conviction at that moment.
“Anyone who really feels as though they have high conviction, who asks for the ball, we have a tendency to go that way, because we’ve worked together for 20 years. We know each other’s tendencies. My bias has historically been towards inaction. The CIO’s bias is towards action. And so we know that about each other.”
Steve Chiavarone, Federated Hermes
That acknowledgment of a personal bias, and of a colleague’s complementary bias, is rare in institutional communication, and relevant precisely because of that. It makes the process more credible than the committee structure alone would: not the existence of committees, but the knowledge of each other’s tendencies determines how quickly and how well a team turns conviction into action.
What this means for the portfolio
For pension funds weighing Federated Hermes’s positions against their own consensus figures, the core message is that the three most notable deviations, the equity overweight, the underweight in EM debt and high yield, and the short-duration position with a twist-steepener view, are not three separate calls. They are the outcome of one shared scenario: no imminent rate hikes, no recession, a secular bull that remains intact, but insufficient compensation for credit risk in the riskier corners of the bond market. Whoever decouples one of the three positions from the other two, in Chiavarone’s view, misses the actual reasoning.
Federated Hermes was nominated for the Asset Allocation Award and won the Fixed Income Award at the 11th edition of the Asset Allocation Awards by Alpha Research.