Navigating the Fixed Income Landscape in 2025: Insights from Recent Investor Meetings

As we step into 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, with inflation (excluding China) remaining 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.



As we navigate this complex landscape, investors should consider the following trends and concerns discussed in recent meetings:

1. The Impact of a Second Trump Administration: Investors are anticipating the potential implications of a second Trump administration on various markets, such as U.S. high yield, emerging markets debt, and investment grade credit. Brian Pacheco, a portfolio manager, expects stronger growth and less regulation, which could benefit the U.S. high yield market. However, he also notes that the energy sector's response to Trump's policies is uncertain. Ricardo Adrogué, another portfolio manager, expresses concerns about geopolitical risks, despite the market's optimism following the election. Omotunde Lawal, a portfolio manager focusing on emerging markets, highlights the uncertainty surrounding tariffs and their impact on both emerging markets and European corporates.
2. Fiscal Dominance and the Role of the Fed: Investors expect the U.S. Federal Reserve to take a back seat in 2025, responding to market events after they occur. Instead, governments will be the dominant macro force influencing markets. Adam Abbas, a portfolio manager, anticipates that the macro backdrop may be favorable, with healthy growth and contained inflation. Peter Palfrey, another portfolio manager, expects elevated interest rates and rate volatility to offer opportunities for investors to play both offense and defense.
3. Inflation Persistence: Adam Abbas and Peter Palfrey discuss the potential persistence of inflation, with Abbas noting that labor supply is healthy, shelter and owners' equivalent rent point to low inflation, and money supply has come down significantly. Palfrey agrees, stating that the shelter component of both headline CPI and PCE is expected to come down in subsequent quarters, and services inflation should also stabilize.
4. Duration Management: Peter Palfrey highlights the importance of duration management, emphasizing that it involves more than just moving Treasury duration up and down. He suggests that investors should consider duration from other sectors, such as spread duration, mortgage portfolio duration, and emerging markets duration. Abbas agrees, noting that they want to get a lot of contribution from credit spread in their overall risk book of their portfolio.
5. Climate Risk and Mortgage Data: Chris Edmonds, President of Fixed Income & Data Services at ICE, discusses the repricing of climate risk and the revolution in mortgage data. He notes that climate risks are coming into sharper focus, with extreme weather events raising costs for communities and companies. ICE Climate is developing tools to inform market participants about global physical and transition risks across fixed income. Additionally, ICE has invested heavily in mortgage services to address data fragmentation and improve pricing accuracy and prepayment modeling for the U.S. mortgage-backed securities market.

In conclusion, the fixed income landscape in 2025 presents a complex interplay of macroeconomic conditions, sector-specific dynamics, and geopolitical uncertainties. By staying informed about the trends and concerns discussed in recent investor meetings, investors can make more informed decisions and better navigate the market. As we continue to monitor the evolving landscape, we remain committed to providing our clients with the insights and tools they need to succeed in this dynamic environment.