Global Fixed Income Strategy - August 2025

Global macro strategy
 

Non-US exposure may enhance income, expand diversification and elevate total return potential
 

This year’s market gyrations offer investors an opportunity to re-examine their portfolio risks – the US dollar’s swoon has shown investors that they are likely over-exposed to the US dollar and missing out on the potential benefits of incorporating some non-US exposure. 

We believe considering a wider opportunity set beyond a single market like the US is inherently beneficial in driving excess return because of the many opportunities to choose from across interest rates, yield curves, and relative country positions. The dominance of US markets has overshadowed other market opportunities over the past decade, but given the economic and policy divergences we see developing globally, we believe the non-US opportunity set is especially ripe.

Macroeconomic trends and policies favor non-US exposure 
 

We believe current economic trends and policy responses have created a positive environment for both market and excess return. Interest rate volatility has declined sharply as global central banks have lowered policy rates and will likely continue lowering them. The US dollar’s high valuation on a historical basis is starting to weigh on it and, given the large US exposure accumulated in portfolios over the past decade, this has recently led to the diversification of the marginal investment dollar. Flows into US dollar assets have shown signs of slowing, and we believe this trend will continue. 

The current global economic cycle reflects economies and policy responses that are not synchronized in timing and magnitude; hence, country outcomes are likely to be divergent. Fundamentally, US policies are forcing all countries to re-evaluate their own domestic policies and reduce their reliance on the US to power global growth. 

Developed market rates: Steeper yield curves offer opportunity
 

We believe the opportunity in rates globally is extremely attractive at this stage. In the US, the yield curve is relatively flat, and the market is pricing in almost 100 basis points of rate cuts over the next 15 months, which we believe will be delivered; however, the excess return from the expected move will likely be limited. In contrast, in Europe, we are at the end of the easing cycle and yield curves are much steeper, so even currency-hedged positions can offer a significant advantage over US rates. The same is true in Japan and Australia, where the steepness of the yield curves makes it attractive to extend into longer maturity bonds. 

Emerging markets (EM) local debt: Potential for lower policy rates 
 

In EM, we believe the opportunity to benefit from potential declines in interest rates is attractive. We expect the linkages between the US dollar and global monetary policy, especially in EM, to be a key driver of rate returns. Rate returns are dependent on the level of rates and the slope of yield curves, in addition to the direction of monetary and fiscal policy. There are several markets where monetary policy remains extremely tight, and, as the US Federal Reserve (Fed) eases policy and the US dollar likely weakens further, we see significant opportunities for EM central banks to further reduce their policy rates. 

Credit: Tight valuations point to fewer opportunities
 

We are finding fewer opportunities in credit. Given our economic outlook and increasing risks, we find credit risk to be fully priced in the US and fairly priced in Europe and EM. We are cautious on US high yield, EM hard currency sovereigns and credit in general. While EM countries have improved their credit profiles over the years, the risk/reward relationship remains weak, in our view, given that spread levels are historically tight.