Analyses
2025 Global Fixed Income Outlook
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Global Fixed Income Bulletin
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janvier 08, 2025
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2025 Global Fixed Income Outlook
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janvier 08, 2025
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2025 Global Fixed Income Outlook
2025 Global Fixed Income Outlook |
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As we enter 2025, the fixed income landscape presents a complex interplay of macroeconomic conditions, sector-specific dynamics, and geopolitical uncertainties. The post-pandemic world is markedly different: inflation (excluding China) remains generally high, while economic growth (excluding the US) is relatively low. Monetary policy is tighter than pre-pandemic levels, while fiscal policy is easy—perhaps even too easy. Additionally, politics has gained prominence; the election of Donald Trump in the US caps off a series of leadership changes in the Western world, with every G7 nation having changed leadership except Italy, which did so during the pandemic. This new landscape will influence bond market behavior in the coming year.
Throughout this outlook, we aim to provide a comprehensive analysis of anticipated trends in fixed income markets, highlighting key areas of opportunity and caution for investors. We will discuss our views on economic conditions, bond yields, credit markets, currencies, and the major risks we believe may arise in the year ahead.
Economic Conditions and Bond Yields:
We expect the U.S. economy to experience solid growth in 2025, primarily driven by the current productivity boom and resilient consumer spending, while Europe is likely to face more subdued economic conditions. The AI boom and the associated investment requirements in both the tech and energy sectors should not be underestimated. Emerging markets present a heterogeneous landscape, offering both opportunities and challenges, particularly in light of potential U.S. trade policies under the Trump administration.
In the U.S., we anticipate growth to remain robust. One of the biggest uncertainties for 2025 is how aggressive the incoming U.S. President Trump will be. Tariff increases, depending on their size and comprehensiveness, are likely to be inflationary and detrimental to growth (as observed in 2018/2019), as will reduced immigration. The market currently does not expect a full implementation, which justifies the positive reaction to his election. The negative impact of tariffs and immigration restrictions (which can be seen as a negative supply shock) may be offset, at least to some degree, by other policies expected to benefit the economy. For instance, we anticipate that supportive fiscal policy, which is currently driving investment and contributing to a productivity boom, will continue to promote strong non-inflationary growth. Market deregulation, including in the energy sector, could also prove disinflationary. Furthermore, household, and corporate balance sheets should remain robust, and a strong labor market will support consumption. Overall, we believe medium-term growth is likely to be strong, but the sequencing of policies and the response of other countries will be crucial in understanding the dynamic interplay of growth, inflation, and Fed policy responses. With growth in 2025 expected to be solid, Fed rate cuts are likely to be smaller (market pricing has correctly adjusted in the last few days of the year) than in 2024.
In Europe, we expect more subdued growth; 2025 should see growth centered around 1%, a meaningful improvement over 2022 and 2023. The manufacturing sector is likely to remain a drag on fixed investment, but a strong services sector will help compensate, supported by a rebound in household consumption that is unlikely to be robust enough to drive significant economic upswing. Additionally, the threat of U.S. tariffs, the ongoing implications of the Russia-Ukraine war, and the China’s economic slowdown have led markets to increase the cumulative easing expected from the ECB. This contrasts sharply with the U.S. bond market, which has significantly reduced the amount of easing anticipated from the Fed moving forward. We expect the ECB to cut rates at least as much, if not more than, the Fed in 2025.
Globally, economic growth is projected to be solid, with estimates between 3.0% and 3.3%. We believe China’s economic growth will stabilize, if not improve, in 2025, supporting a positive global economic outlook. Despite facing trade uncertainties and geopolitical tensions, the global economy is expected to benefit from coordinated monetary policies and improved consumer sentiment across various regions. All central banks, except for Japan and Brazil, are easing policy, which bolsters the economic outlook. This backdrop will significantly impact managing inflationary pressures worldwide.
Regarding interest rates, we believe U.S. yields are likely to remain range-bound in the coming year as markets attempt to decipher the true state of the economy—considering solid growth, a stable unemployment rate, and gently declining inflation—as well as the likely scale of the incoming administration’s policies. Some central banks, like the ECB and the Bank of Canada, may accelerate rate cuts, while others, such as the Bank of Mexico and various emerging market central banks, may pause or slow their rate-cutting in response to ongoing uncertainty and dollar strength. One of the biggest risks to this benign outlook is how firmly the market holds onto it.
We remain agnostic about the near-term outlook for U.S. yields, anticipating a range of 4% to 4.75% for the U.S. Treasury 10-year, with rate cuts unlikely to exceed those currently priced into the markets. Given that and lack of term premium in the U.S. yield curve we continue to avoid longer-duration bonds. Aside from Japan, we are neutral on duration in developed markets overalland retain curve steepening exposures, particularly in the U.S. Cross-market, we remain underweight U.S. duration compared to New Zealand, based on economic and monetary policy outlook differentials. We also maintain an underweight position in Japanese government bonds and are long Japanese inflation breakevens, as we believe Japanese inflation is structurally moving higher, prompting the BoJ to raise interest rates more than the market currently anticipates. At this time, we do not believe portfolio risks should tilt toward taking on above-normal interest rate risk, as credit sectors appear more rewarding. However, from a longer-term perspective, nominal and real yields in most countries are high by historical standards, suggesting that investors with a longer-than-one-year horizon may find that even a buy-and-hold strategy can yield rewarding returns if executed correctly with the appropriate fixed income sectors.
Credit Markets:
Our base case remains constructive for credit, supported by expectations of a “soft landing,” fiscal policy that remains conducive to growth, employment, and consumption, and strong corporate fundamentals (both at the investment-grade and high-yield levels). Assuming our forecast that the Republican administration’s agenda is implemented to some degree (we are more confident about deregulation and tax cuts than about trade), U.S. corporate performance should remain solid, benefiting credit spreads.
However, the longer-term impact of Republican policies is less clear. Greater opportunities and more regulatory leeway typically lead to riskier behavior and increased leverage, which is not usually positive for creditors. With credit spreads on the tighter side (tight by historical standards but not expensive), opportunities remain attractive; however, we do not expect high excess returns. Security selection will remain key given current valuations. The absolute level of yields appears satisfactory, even amidst significant uncertainty surrounding the Trump administration, particularly from a medium-term perspective. While spreads look historically tight, yields (when combining spreads with the risk-free U.S. Treasury or German government bond yields) appear compelling by historical comparison. Regarding risks, there is little reason to expect spreads to widen materially when economic growth is decent and central banks are cutting interest rates. On a positive note, yield-focused buying should help contain spread widening. We remain modestly overweight in credit within our portfolios, with a slight bias toward financials.
Amid the current noise and uncertainty, we continue to believe that the most attractive opportunities lie in securitized credit, particularly in U.S. mortgage-backed securities. U.S. households with prime credit ratings maintain strong balance sheets, which should continue to support consumer credit and ancillary structures, especially as housing prices remain firm and the unemployment rate stays low. Changes in U.S. tax policy should also be supportive. Higher coupon U.S. agency mortgage securities continue to be attractive compared to investment-grade corporates, and we believe they are likely to outperform U.S. Treasury securities. Similar to our corporate credit positioning, we aim to enhance our securitized credit exposures by moving up in credit quality and out of non-U.S. structures, given tighter spreads and increased macroeconomic risks in Europe. One area within securitized credit that may be vulnerable to potential shifts in Fed policy is office backed commercial mortgage-backed securities (CMBS). If interest rates do not fall as much as expected, refinancing many U.S. office-backed deals could become problematic, prompting us to generally avoid this sector. However, transparency in this sector has significantly improved, allowing investors to identify solid collateral (office buildings) versus problematic investments that should be avoided. It is quite possible that we will increase our exposure to CMBS in 2025 as opportunities arise.
Emerging Markets:
Emerging market bonds are likely to face headwinds under a Republican-led administration. Stronger U.S. growth, coupled with higher rates for an extended period and weaker global trade linkages, is typically not conducive to strong EM performance. Some of Trump’s comments regarding the BRIC countries suggest a potentially volatile environment that these nations will need to navigate in the coming years. Nevertheless, we believe that countries with solid economic outlooks, decent growth, declining inflation, and central banks willing and able to cut interest rates—despite policy changes in the U.S.—are likely to perform well. Potential U.S. trade policies will not impact all countries equally, making it essential to focus on individual country fundamentals, as specific nations may still offer investment opportunities amid broader uncertainties. Indeed, in the years following Trump's first administration, countries like Vietnam benefitted from trade diversions from heavily tariffed nations. This pattern is likely to continue during and after the second Trump administration.
Currency Markets:
In currency markets, the outlook for the U.S. dollar remains strong following the U.S. election. While the dollar appears stretched compared to its historical levels, its fundamental support remains robust. Easier fiscal policy, tighter monetary policy (relative to prior expectations), trade wars, and stronger U.S. growth all bode well for the dollar. Economic fundamentals in most countries remain inferior to those in the U.S. concerning the growth/inflation nexus. However, one caveat to this optimistic narrative could be a deterioration in the labor market and signs that the Fed may become more aggressive in cutting rates. Further deterioration would provide the Fed with room to continue cutting interest rates, as long as the Trump agenda does not disrupt the inflation outlook. The U.S. economy continues to excel regarding its growth trajectory, productivity performance, profit results, and yield levels. It will be challenging for other countries to generate the kind of fundamental support that the U.S. dollar enjoys, especially with a Republican administration focused on implementing a higher tariff strategy. This presents a high hurdle for other currencies to overcome in terms of fundamentals. That said, much of this good news is already reflected in the price, reducing the upside potential for the dollar.
Major Risks:
The fixed income market faces several risks in 2025, including geopolitical tensions that could disrupt supply chains and market confidence. Furthermore, aggressive corporate behavior, driven by strong profits, may lead to increased leverage and asset quality concerns, although it may also result in stronger economic growth and higher inflation. Importantly, a resurgence in inflation could restrict the Fed’s ability to maintain accommodative policies, while volatility in equity and interest rates might undermine investor confidence in carry trades and hinder the growth agenda of the Trump administration. Indeed, as mentioned earlier, a curtailment of monetary easing and rising yields could pose significant risks for economies in 2025, though this remains a risk rather than a high-probability outcome—at least for now.
Summary:
The fixed income outlook for 2025 presents a mix of opportunities and challenges across various sectors. As investors navigate this complex landscape, a careful and strategic approach is essential. Staying informed about macroeconomic indicators and sector-specific developments will be critical for making informed investment decisions. With a focus on high-quality credits, securitized products, and selective exposure to emerging markets, investors can position themselves to capitalize on potential growth while mitigating risks associated with the evolving economic environment.