Fixed Income Outlook 1Q 2025
Fundamentals First
Focus on Fundamentals
Our central expectation for 2025 is a continued global expansion, further easing of inflation, and broadening central bank rate cuts. However, the outcome of the US election and potential policy shifts add a new layer of uncertainty to the outlook. As we await policy announcements, particularly across trade, fiscal, and immigration, we remain focused on fundamentals such as labor market conditions, which inform consumer spending, and the health of private sector balance sheets, which continue to support income potential across various fixed income sectors.
Diversify Your Duration
Each G10 economy is set to start 2025 with lower inflation compared to the start of 2024. Consequently, we expect every G10 central bank, except the Bank of Japan, to deliver rate cuts in 2025. However, the pace and destination will vary. This presents opportunities for relative value interest rate exposures and a more diversified approach to duration.
Capture Income
While fixed income spreads are tight, a combination of deteriorating fundamentals and weakening technical dynamics would be needed to trigger a turn in the credit cycle, which is not our base case for the coming year. Importantly, income potential across corporate bonds and securitized sectors remains attractive, and our company-level analysis reinforces our benign downgrade and default activity expectations.
Consider Tail Risks in Both Directions
The 2020s have taught us to expect the unexpected, and entering 2025, we see risks to the global expansion tilted in both directions. A key downside risk is universal US tariffs, adding to existing growth weakness in the Eurozone and China. Conversely, global growth could improve with proactive fiscal stimulus in China or looser fiscal policy in Germany following the election, challenging prevailing pessimism about the Euro area.
Stay Dynamic
As the year unfolds, the importance of balanced exposures, along with a dynamic approach to capture opportunities, will be key. For example, we remain vigilant about any revival in "animal spirits" that could lead to less disciplined balance sheet management and challenge our constructive view on credit fundamentals. We aim to uphold intellectual humility to learn and adapt as the investment landscape evolves.
Source: Macrobond. As of December 31, 2024. Abbreviations: US Federal Reserve (Fed), Reserve Bank of New Zealand (RBNZ), Bank of England (BoE), Bank of Canada (BoC), Reserve Bank of Australia (RBA), European Central Bank (ECB), Swiss National Bank (SNB). Fed funds rate reflects upper bound. The economic and market forecasts presented herein are for informational purposes as of the date of this webpage. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this webpage.
What We’re Watching
US Policy Mix
The first 100 days of the Trump administration will be crucial for assessing legislative priorities. If implemented, tariffs could impact growth and inflation through various direct and indirect channels. The primary risk to global expansion and financial markets would come from a universal rise in tariffs. Overall, the implications for growth, inflation, and policy are complex and vary by economy.
Consumer Spending
Consumer spending, a key driver of economic growth in major economies, is influenced by the health of the labor market, household financial well-being, and confidence in economic prospects. Overall, conditions for sustained consumer spending remain in place, supporting corporate earnings growth and income potential across corporate and securitized credit. However, we observe divergence across countries and among consumer cohorts, highlighting the importance of bottom-up security selection.
Politics & Policies
The significant rise in public debt post-Covid, coupled with limited prospects for near-term consolidation and political uncertainty, could lead to volatility in sovereign bond markets, as seen in the UK in 2022 and France in 2024. The experience in France highlights the political challenges of enacting fiscal consolidation, which can create heightened policy uncertainty and weigh on investment and economic activity. However, political change can also catalyze an expansion in fiscal measures that may unlock growth opportunities. Germany stands out as a key candidate in this regard. The upcoming election in February could broaden fiscal options, potentially leading to increased investment spending and a revival of the economy. This would benefit the broader Euro area and help offset potential headwinds from hawkish US trade policy.
Our Fixed Income Outlook 1Q 2025 features:
• US Policy Shifts in a Second Trump Term
• Credit Check-In
• Asset Class Views
…and more. Download our quarterly outlook below.
