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Bonds in Brief: Making Sense of the Macro

Marco Giordano, Investment Director
March 2025
4 min read
2026-03-31
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
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The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

Welcome to February’s edition of Bonds in Brief, our monthly assessment of risks and opportunities within bond markets for fixed income investors. Each month, we explore material macro changes and how best to navigate the latest risks and opportunities we see within bond markets.

Key points

  • Fixed income markets continued to rally as concerns over the potential negative growth impulse from global tariffs, turmoil in the US federal government and heightened uncertainty hit sentiment. Credit spreads widened, with most spread sectors underperforming equivalent government bonds. 
  • Following Germany’s election, the leaders of the incoming Christian Democratic Union/Social Democratic Party coalition announced a sweeping fiscal overhaul on 4 March. The overhaul, which amounts to Germany committing to raise its debt-to-GDP level by as much as 20%, significantly impacted markets: bond yields moved sharply higher across the euro area, the 10-year German bund yield experienced its biggest single-day jump since March 1990 and Italy’s 10-year bond spread over Germany fell below 100 bps. Elsewhere, bond yields moved modestly higher in Australia, New Zealand and Japan while US bond yields continued to trend lower. 
  • A solid labour market with low unemployment across the world continued to support growth, fuelled by resilient consumer spending. However, anxiety about potential tariffs started to weigh on business and consumer sentiment. The “animal spirits” of the beginning of 2025 have started to abate, as investors are faced with a deluge of concerning developments around global trade and a growing risk that policy uncertainty could weaken growth. This was reflected in currency markets, where the US dollar has erased most of the gains made in the fourth quarter of 2024, with the euro strengthening on the back of Germany’s fiscal overhaul.

What are we watching? 

  • The implications of Germany’s fiscal package. With Germany’s growth model likely to shift from export-led to more domestic-demand driven, an important upside tail for Europe is materialising. On conservative assumptions, Germany’s trend growth could rise by at least 0.5% over the long term. Equally, the overhaul could be a stabilising force in the euro area as a whole. Austerity over the past 15 years has weighed on the region’s growth and made it harder for the periphery to regain competitiveness during and after the sovereign debt crisis. Markets can now expect higher nominal growth rates to be positive for credit given that the spending increase is being driven by the most fiscally credible country in Europe. In addition, given that Germany’s nominal GDP growth rate will shift higher, monetary policy risks becoming loose across the entire euro area. This is before we consider the rise in inflation the fiscal package could cause. We think this has strengthened the case for structurally higher inflation, as additional growth will be added to an economy not far from full employment, with implications for the entire currency union. Finally, a fiscal U-turn of this magnitude will reduce Germany’s current account surplus by at least 2%. The structural flow of capital into global safe assets, particularly US fixed income, could therefore slow or even reverse. Germany’s announcement is likely to drive term premia higher and, in particular, push US yields higher over time. 
  • Geopolitical uncertainty. Over the last several weeks, we may have witnessed the de facto end of the Atlantic alliance — the military and political alliance led by the US that has dominated the post-WW2 era — at least in its current form. The new administration is attempting a strategic pivot to either a détente with Russia or to relieve immediate tension with the country. It remains unclear what the end state of such a new paradigm would look like. It is unlikely that Europe will follow the US in this matter and as stated by US Secretary of Defense Pete Hegseth, the US will no longer be Europe’s primary security guarantor. Following a tumultuous Zelensky meeting in the Oval Office, European powers will likely have to start a rearmament programme that will require substantial fiscal spending. The end of the Atlantic alliance (at least informally at this point) likely means a more fragmented world, with additional volatility, increased fiscal spending on defence and the formation of additional trade blocs.
  • Reciprocal tariffs. President Trump ordered an examination of reciprocal tariffs and value-added taxes across US trading partners, with a deadline of 1 April for various agencies to report on "unfair" trade practices and policies. There are important implications if the US follows through with reciprocal tariffs. Trump's proposal to include VAT as a tariff and potentially implement extreme tariffs could add 2% to US inflation and lead to stagflation, and possibly a global recession. Alternatively, the threat of tariffs could lead to lower global average tariff rates if countries reduce their own tariffs and VAT in response, benefiting growth and inflation.

Where are the opportunities? 

  • Given how drawn out and uncertain the rate cycle has been, our key conviction remains a focus on higher-quality total return strategies that are less constrained by benchmarks. This could include global sovereign and currency strategies that have the potential to shine during these periods or unconstrained strategies that are able to navigate the late cycle by allocating across different sectors. These strategies could also enable investors to allocate capital away from cash and reduce reinvestment risk without taking on significant duration or credit risk. 
  • In an increasingly volatile and uncertain market environment, we see core fixed income, whether aggregate or credit strategies, as increasingly attractive from both an income and capital protection perspective. All-in yields remain attractive for investors looking to de-risk within a broadly diversified portfolio. And for European investors looking to protect themselves from ongoing volatility, high-quality income may offer an attractive avenue not just in local but also global markets.
  • We think high-yield debt still offers potential, but advocate a cautious approach given market uncertainty and the normalising of default rates relative to current spreads. At the same time, the robust additional income potential may make high yield a good equity substitute. For all higher-yielding credit, we believe an “up-in-quality” issuer bias is warranted.

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