Julia Hermann, global market strategist at New York Life Investment Management, joined Full Signal to explain why she sees a shift into a market-led liquidity regime that changes how investors should think about the Fed put.
She argues the US is furthest along that shift, said her team still expects one more Fed hike by year-end, and pointed to financials, international equity and shorter-duration fixed income as places she sees relative opportunity.
A market-led liquidity regime, not just crisis liquidity
Hermann said investors usually treat liquidity as something that breaks — a bank failure or the Fed backstopping markets with QE.
Her research pulls the lens wider.
Liquidity, she argued, also shapes multi-decade asset allocation, depending on who supplies it: banks, central banks, or non-banks.
"We're entering a more non-bank led or market led liquidity regime," she said. In her framework, the U.S. is market-led, Europe remains largely bank-led — "80% of all credit in Europe is happening through direct bank lending" — and Japan is still central-bank heavy, with the Bank of Japan "owning about half of all Japanese government bonds outstanding."
Signs of the US shift she cited include private investors now dominating Treasury ownership, thinner dealer balance sheets, and the rise of private credit.
What the Fed put looks like from here
The big implication, Hermann told me, is how investors should rethink the Fed put.
Markets have been conditioned to expect the Fed to "bail out investors" with facilities or QE when things go wrong. In a regime where more liquidity comes from non-banks — institutions the Fed is not legally obligated to backstop — that conversation changes.
She still expects the Fed to defend core market functioning, especially Treasuries. What she challenged is the lazy assumption that "if the equity market's 30% down, the Fed's going to step in."
"The US equity market is roughly about 250% of GDP," she said, which makes a deep equity bear market hard to ignore given the household wealth effect.
On the near-term path, her team believes "it's likely that we'll get one more hike from the Fed between now and the end of the year," while staying cautious on a full hiking cycle.
She pointed to "wage growth that's decelerating to a sustainable 3%" and questioned whether the labor market can tolerate "100 basis points or 150 basis points of hiking."
I also covered Fed risk with Warren Pies in Warren Pies on the Fed Hike, AI Compute Demand and Stocks.
Total portfolios, AI CapEx and the "bound sandwich"
Hermann linked the liquidity shift to how big allocators manage money. Strategic asset allocation still sets long-term sleeve weights. The total portfolio approach, percolating for 10 to 15 years, tries to "maximize agility, flexibility in risk management, and flexibility in liquidity management."
Her example was bonds and stocks that share the same hyperscaler AI exposure. A total-portfolio lens asks how that shared risk behaves under stress — and where the marginal dollar of liquidity comes from.
On alternatives, she warned that "a more liquid wrapper around illiquid assets is still ultimately an illiquid asset."
AI, she said, is "just this monster capital importer," with at least "$250 billion" of AI-related public credit issuance this year. She does not yet call that a systemic liquidity drain, because demand has met the supply. The risk is what she called a "bound sandwich": CapEx that is neither too low nor so high it threatens free cash flow or sparks bubble fears.
Where Hermann sees opportunity: financials and fixed income
Inside U.S. equities, Hermann said true diversification is hard when AI dominates. "Financials would be our preferred spot there," she said, as a diversifier on a cyclical six-to-12-month horizon, alongside international developed equities for more non-AI exposure.
She also liked fixed income for new capital after a difficult stretch for bond prices. "We think that now is a really good opportunity for the buy and hold investor in fixed income," she said, favoring shorter maturity and duration to buffer rate volatility.
Tune in to the full conversation with Julia Hermann on YouTube, Spotify and Apple Podcasts.
For more on bond yields and the AI cycle, see Bloomberg Macro Strategist Tatiana Darie on the biggest risks and opportunities in the market today, and subscribe to the free Opening Bell Daily newsletter for a daily briefing on stocks, macro and Wall Street.
This article is for informational purposes only and is not investment advice. Views and stock opinions are those of Julia Hermann and market figures are as stated by the guest at the time of recording.