European fixed income markets generally delivered solid total returns in 2024, thanks to high yields and continued spread tightening. With central banks on the path to providing policy accommodation and elevated yields still prevailing, we believe fixed income markets will continue to offer compelling opportunities in 2025 that European investors can capitalise on. Specifically, we think diverging monetary policies, geopolitical instability, tariffs and potentially heightened volatility will create attractive opportunities for sector rotation and security selection. Below, we highlight our top five fixed income ideas for 2025:
- Investment-grade (IG) credit — Despite credit spreads compressing in 2024, still elevated government bond yields mean that IG credit remains attractive from both a yield and an income perspective. The duration exposure may also serve as a counterbalance to credit risk if there is a sudden deterioration in credit fundamentals or if higher tariffs prompt central banks to cut interest rates aggressively. We believe that the European credit cycle remains robust and are encouraged by strong demand for investment-grade corporate bonds and resilient fundamentals among higher-quality issuers. We expect dispersion across regions, sectors and issuers to increase further, as global growth steadies and companies become more willing to explore avenues for expansion beyond organic growth, including debt-financed M&A. And while we acknowledge the risks associated with a prolonged stand-off on tariffs, we believe cautious optimism is warranted and see potential for alpha generation through security selection and sector allocation across the investment-grade credit universe. For investors looking to generate returns through income, short-duration approaches allow for a spread pick-up relative to cash. They could also benefit from attractive rates on the shorter end of the curve, with lower expected volatility than longer-duration bonds.
- Portfolio usage: income, derisking and liquidity
- Unconstrained fixed income — In our opinion, total return fixed income strategies that are less constrained by benchmarks may be best positioned to navigate this later stage of the economic/credit cycle, which we expect to coincide with heightened volatility.
As central banks chart different policy paths, we anticipate that dispersion in economic growth and inflation is likely to persist, creating market dislocations. We also think it’s important for investors to stay nimble with their portfolio allocations given the uncertain market and policy landscape. These considerations entail sizeable allocations to liquidity and developed market government bonds with ample scope to capitalise on market opportunities as they arise.- Portfolio usage: diversification, liquidity, derisking and total return
- European high yield — We think that all-in yields continue to offer an attractive opportunity for investors seeking high total return potential. On a regional basis, we see relative value in Europe compared to the US, particularly when taking into account differences at the sector and rating level. We expect corporate earnings for issuers to remain relatively strong, and we do not see a full-scale default cycle on the horizon for 2025. Instead, we believe default rates are likely to remain low over the next 12 months. However, given tight spreads, European high yield may be particularly prone to greater dispersion between sectors and issuers, and therefore we believe active management and a focus on fundamental analysis to separate the winners from the losers is crucial.
- Portfolio usage: total return and income
- High-quality duration — While the economic cycle may be less predictable, we believe it would be short-sighted to avoid higher-quality fixed income or duration on fears of market volatility or higher interest rates. In fact, the opportunity cost of adding duration — and therefore downside protection — has fallen significantly given the rise in yields over the last few years. Investors can now embed a focus on capital preservation in a portfolio while also earning an attractive yield as a source of income. As uncertainty clouds an otherwise relatively benign global outlook, high-quality fixed income can act as a source of liquidity and a hedge in a risk-off environment: should an exogenous shock occur, there is room for policymakers to cut rates further, so capital appreciation can potentially make up for losses elsewhere in a portfolio.
- Portfolio usage: diversification and liquidity
- The power of diversification — Global fixed income markets continue to offer a broad spectrum of investment opportunities across sectors, and a specialist-driven approach can capture the opportunities arising from ongoing uncertainty. A focus on specific sectors, regions or markets can provide a diversified stream of returns. Specifically, areas such as emerging markets (EM), Asia credit, securitised bonds and private placements offer the potential to enhance returns while helping to manage the volatility of a broader portfolio. Moreover, as the EM universe is particularly broad, we expect EM countries and companies to be impacted by global growth and inflation dynamics in different ways. An opportunistic, blended approach could be an efficient way to manage those dynamics and seek appropriate exposure to the likely engines of global growth.
- Portfolio usage: diversification and total return
