Since our first conversation on Fixed Income at the beginning of the year, a lot has changed. When it comes to purchasing decisions, it makes sense in the current environment to stick with quality names in the belly of the yield curve. Extra yield can be found in the USD high-yield names and hard-currency emerging market corporate issuers.

What has changed in the fixed income space since the start of 2025?

2025 saw the ‘Trump 2.0’ era arrive with quite a bang, and its impact has been felt across financial markets. When it comes to the bond markets, they were also not immune to the administration’s shocks, but the spread-widening that occurred has now been broadly, if not completely, reversed. What remains, however, is the uncertainty about the outcome for global trade policy and beyond. Yes, the headline tariffs that shocked the markets on 2 April have been just as dramatically slashed, but uncertainty remains, not just around trade but also with regards to fiscal policy and interest rates. In this context, our analysts do not recommend any big strategy changes in bond portfolios right now, apart from perhaps using spread-tightening to reduce positions in those issuers with the weakest balance sheets, and therefore most susceptible to credit risk. This does not mean, however, that we do not like the high-yield segment at all: in USD, the high-quality names there currently offer investors the best value, while default risks are still moderate.

Given the changes in the markets, do you have any bond preferences? 

Our analysts maintain a preference for the crossover space in USD bonds, i.e. BBB/BB rated corporates. The US high-yield bond market contains structurally better credit quality than it did in the past, and we believe that the highest-quality bucket within the segment (those companies rated BB) should be able to withstand any further cooling off in the US economy, especially given that current yields offer a meaningful buffer. For similar reasons, quality low-investment-grade bonds (i.e. those rated BBB) also fit the bill and are thus still rated Overweight.

We are often asked whether or not it is time to extend duration. The yields of 30-year US Treasury bonds have nudged higher and, indeed, even approached the multi-year highs that we last saw in October 2023. However, long-dated yields are likely to remain higher for longer now, as investors demand a higher premium to hold longer maturities. Technically speaking, the term premium will remain elevated, and we do not see yields collapsing from here, which reduces the attractiveness of very-long-duration position-taking. For this reason, we continue to prefer the so-called belly of the yield curve, i.e. the ‘Goldilocks’ 3-to-7-year maturities, which provide the best balance of both reinvestment and duration risks.

Going into the second half of 2025, what opportunities do you see for investors?

The erratic trade policy that has emerged from the US this year also led to a weaker USD, and the current risk-on phase due to easing tariff risks is not creating tailwinds for the currency. In fact, our currency analysts are of the view that despite its recent consolidation, the USD will remain in its lower trading range and faces substantial risks. As such, European investors are also looking for investment opportunities at home, and quality EUR bonds offer a decent return at this point. Continued disinflation should open the door for further cuts from the European Central Bank, ultimately benefiting those bonds. Moreover, safe-haven seekers might find bonds in currencies such as the CHF a valuable addition to their portfolios.

With the shift away from the US, there has been a lot of talk about emerging market (EM) bonds. What do investors need to know?

EM bonds have shown remarkable resilience so far in 2025. The US dilemma as to whether to cut interest rates to support growth or wait for hard data first is clearly having an impact on EM central banks, causing them to pause too. However, we believe that this pause will only be temporary and expect easing cycles to resume in the second half of 2025, prompted by downward revisions to growth, lower energy prices, declining inflation, and stronger EM currencies. Of course, these easing cycles should be further boosted when the US Federal Reserve starts easing as well, and our economists currently expect meaningful cuts before the end of the year. The current weakness in the USD is certainly another supportive factor for EM bonds. That said, we maintain our Neutral call on EM sovereign hard-currency bonds, not least because spreads are still very tight. EM corporate bonds, however, remain in favour, since corporate fundamental metrics are strong and default rates remain low. We maintain our Overweight rating on EM corporate hard-currency bonds, with a preference for the higher-rated names.

Find out more about the current investment environment in our Market Outlook Mid-Year 2025.