Art by Andrea D’Aquino 2025 could be an interesting year for fixed income. End-of–year performance across credit asset classes was broadly positive and many of the trends driving that performance appear likely to continue. However, 2024’s elections in the U.S. and the deterioration of governments in several EU member states could add to ongoing geopolitical uncertainty. That uncertainty could impact credit performance in a handful of major investment markets and is pushing some investors to look for diversification in global credit and private credit.Sources say, with so many unknowns going into the beginning of 2025 it is hard to forecast how performance will ultimately shake out. Investors may choose to be a bit more tactical over the next six months in response to higher volatility and greater uncertainty.The GoodAccording to a recent research note from Schroders, we’re likely to start 2025 “with 10-year U.S. Treasury nominal yields above 4%, and real yields (net of inflation) above 2%, an attractive level of income we haven’t seen since the 2008 financial crisis.” This will mitigate some of the negative carry that has made holding long-duration bonds more expensive in recent years.For more stories like this, sign up for the CIO Alert daily newsletter.
The Federal Reserve also made good on its December quarter point cut, a move which markets wanted and had already priced in. The European Central Bank cut rates by 25 bps, also as expected. Alongside that cut, President Lagarde’s forward guidance was more hawkish than expected, driving an increase in medium-term yields.These trends will likely be supportive for treasury portfolios going into the first quarter while markets figure out whether more rate cuts are on deck. Markets have signaled that they want more cuts but during his most recent remarks, Fed Chair Powell indicated he was fairly comfortable with where rates are now relative to economic and inflation data – a position which many interpreted as dovish on future cuts.Even without additional cuts, bonds could be boosted by lower overall inflation. Schroders notes that “at lower inflation levels, the diversification benefit of bonds increases, providing a more efficient hedge against weakness in cyclical assets. Bonds also look cheap versus alternative assets, with current yields higher than that of the expected earnings yield on the S&P 500.”Simon Dangoor, head of fixed income macro strategies at Goldman Sachs Asset Management, adds that 2025 is likely to be a good year for getting income from credit investments. “A big feature of 2024 is that spreads compressed to very tight levels which makes things look expensive at face value. That might lead some investors to say they want to take money off the table and head for the hills, but I think, in the U.S. in particular given the fundamental and technical aspects of the market right now, 2025 could still be a very good year for income.”These trends extend in
Dom. Gen 5th, 2025
