Time to Be Selective and Flexible: 2025 Fixed Income Outlook

Apr 30, 2025

Investors in bond markets should choose carefully this year, considering sectors such as corporate credit, securitized credit and emerging-market debt that may provide relative value and diversification.

Andrew W. Goodale
Institutional Portfolio Manager and Managing Director, Broad Markets Fixed Income Team

Key Takeaways

  • Uncertainty about U.S. fiscal policy and the economy are key factors driving markets and are likely to continue causing heightened volatility through the year.  

  • In this environment, bond investors must be selective and can consider certain types of debt that may provide relative value and diversification. 

  • Select opportunities lie in high-yield corporates, securitized credit and emerging-market bonds, among other areas. 

In the coming months, global fixed-income markets will be laser focused on the priorities of the Trump administration. As the agenda unfolds and the market waits for more clarity on U.S. tariff policies and responses from global governments, bond investors should prioritize the active selection of both sectors and individual securities, as fiscal policies are likely to further increase fundamental dispersion (the spread of returns among fixed-income assets) as well as volatility in interest rates and spreads (the difference in yields between bonds).  

 

Amid this heightened uncertainty, fixed income should continue to provide a strong negative correlation to risky assets in portfolios. In 2025, institutional investors should shift focus in four main ways: 

 

  1. Select actively: Adjust portfolio duration and strategically position assets that seek to outperform passive benchmarks by identifying mispriced securities and exploiting market inefficiencies. 
  2. Focus on credit quality and risk-adjusted returns: Choose specific bonds based on these factors, since tight spreads on investment-grade and expensive high-yield bonds are squeezing value from broad indices. 
  3. Optimize the mix: Consider a blend of U.S. Treasuries, corporate bonds, securitized credit and emerging-market debt, and take advantage of changes in the yield curve between short and long durations. 
  4. Assess macro conditions: Pay attention to evolving macroeconomic factors, including tariff policies from the Trump administration, the fiscal outlook in the U.S., monetary policy and their effects on credit markets. 

 

With these guideposts in mind, U.S. fixed-income allocations may provide the potential for strong income, total returns and portfolio diversification. Despite volatility following the tariff announcements, the interest rate market has been slowly recouping some recent losses. In the investment grade sector, corporate fundamentals are still resilient and new issue supply has picked up after a quiet two weeks. In addition, starting yields are at some of their highest levels since the financial crisis. Historically, high starting yields have been a reliable indicator of future returns, suggesting that bonds with higher yields at the time of purchase may offer greater total returns over time.1

 

Opportunities in Select Debt Categories 

Corporate credit: Despite heightened uncertainty with the administration's new tariff regime, it’s important to remember that corporate balance sheets entered 2025 in good shape. This means that within the investment-grade (IG) sector, company fundamentals are still strong, although the effect of tariffs on global supply chains complicates forecasts for certain sub-sectors, such as autos and retail. While volatility will likely continue, IG credit spreads and yields do compensate investors for more risk than they did a few weeks ago. As details of the new tariff plan unfold in coming months, investors should focus on high-quality issuers with strong balance sheets, rather than broad corporate exposure via passive indices. Additionally, while there are selective opportunities in high-yield bonds, high-quality bonds are more attractive than bank loans in multi-sector strategies, given slow economic growth and a dovish Fed trajectory in the second half of the year. 

 

Securitized credit: Securitized credit sectors (asset-backed securities, commercial mortgage-backed securities and mortgage-backed securities) were among the best performing in 2024, and in the first few months of 2025. Amid the recent tariff-driven selloff, agency mortgage-backed securities (MBS) outperformed the investment-grade and high-yield sectors. MBS and asset-backed securities offer higher-yield spreads than traditional investment-grade corporate bonds, making them an attractive choice for investors seeking enhanced income. Strong consumer credit fundamentals and the resilience of U.S. households support structured credit markets. These securities also allow investors to move up the capital structure by investing in higher-rated tranches (AAA or AA) while capturing attractive risk-adjusted returns. 

 

Emerging-market debt: There are select bond opportunities in countries with strong fundamentals and central banks willing to cut rates. Although potential U.S. policy shifts pose risks, investors should also take a targeted approach to other markets, emphasizing countries with stable growth, improving fiscal positions and proactive monetary policies. Additionally, continued U.S. dollar weakness would be positive for emerging-market currencies. Investors can consider debt in emerging-market countries more shielded from U.S. policies. 

 

Curve steepeners: The yield curve is expected to steepen during the year, meaning long-term bond yields could rise relative to short-term yields. Since the April 2nd tariffs announcement, the U.S. Treasury yield curve steepened drastically, mostly driven by the selloff in long-term bonds. This environment contrasts with the past few years, when short-term yields exceeded long-term yields (yield-curve inversions), weakening the case for long-term bonds, corporate credit and riskier fixed-income sectors. It creates a case for curve steepeners (overweighting shorter-term bonds matched with an underweight to longer-term bonds). In addition, duration management plays a critical role with the Federal Reserve expected to cut rates gradually. 

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