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Fixed income assets face a range of opportunities and challenges in 2025 including trade tariffs, immigration issues and geopolitical concerns.
Our latest webinar discussed these factors and talked about the diverse solutions for clients invested in fixed income. Ben Gutteridge, Portfolio Manager, Multi-Asset Strategies, was joined by Michael Matthews, Co-Head of IFI Europe and fixed income fund managers, Stuart Edwards and Alexandra Ivanova.
Read our key takeaways for the highlights and watch the webinar replay to see the full conversation.
Michael Matthews, Co-Head of Invesco Fixed Income said the challenge we have is that spreads are tight for investment grade market. In February, the current spread for yields was 92 basis points. An investment grade market with a spread under 100 basis points has got to be considered expensive by historic comparison. Yields are quite attractive, but they come more through a risk-free rate rather than good credit spreads. In his view it makes sense to be defensive.
Source: Macrobond, 19 February 2025
Stuart Edwards, fund manager of Invesco Tactical Bond Fund (UK) explained that credit exposure can be used as a significant component of his portfolio due to its flexible nature, though the fund's credit exposure has decreased significantly over the past 2-3 years. Current valuations are not compelling, with many investors focusing on outright yields without considering credit spreads. In our view, there are attractive opportunities in shorter-duration securities.
Edwards noted that while yields appear attractive from a long-term perspective, the bond market is transitioning to play a more balanced role in portfolios. With persistent inflation in the US and UK, government bonds are becoming a hedge against a broader mix of assets, including equities. Recent survey evidence from the US has shown warning signs around confidence, with weak consumer sentiment surveys. If this impacts labour market data, government bonds could be a favourable place to be.
Matthews believes we are currently in a higher rate environment; we think adding some duration to a portfolio makes sense. Some of the duration we have in the Invesco Corporate Bond Fund (UK) is through gilts, rather than credit. We should be cautious but optimistic about duration.
Ivanova highlighted that yield levels across the globe are becoming increasingly attractive, with government bonds providing valuable diversification from riskier assets. We have been actively responding to higher yield levels, finding more value in the long end of the yield curve in the US after repricing in response to Trump trade tariffs and fiscal fears. In Europe, there’s a notable focus on defence spending and fiscal expansion, making it crucial to rotate and be selective with duration. This strategic approach underscores the importance of adapting to market conditions to optimise returns.
Whilst inflation has been sticky, services inflation is moving in a positive direction. The Bank of England (BoE) is focused on reducing inflation but is expected to cut rates two or three times, bringing the base rate to 3.8% in a year. This would bring it to the range that is considered to be neutral. If downside growth risks materialise, there could be additional cuts to inflation.
For the bond market, opportunities exist in the short end or the belly of the curve, while the long end requires consideration of additional factors, such as the willingness of investors to take down supply. The gilt market presents opportunities to re-engage and take on some risk. Matthews added that further rate cuts by the BoE could be beneficial for bonds, similar to the demand seen for European Credit when the European Central Bank (ECB) cut rates.
Trump's policies, including tariff risks and tax cuts, initially caused the US dollar to strengthen and equity markets to rise. This knocked some confidence in the bond markets, steepening the yield curve. Over time, some of these changes have reversed slightly, reflecting policy uncertainty. It's unclear if tariff risks are for negotiation or structural realignment.
Ivanova’s response to the increasing uncertainty of the proposed policies, is to be attuned to the marketplace. Interestingly, Stuart discussed the idea that US exceptionalism is beginning to fray, due to tight monetary policy. US exceptionalism was driven by US equities, notably due to the success of the ‘Magnificent 7’, however this is being challenged by global competitiveness.
In our view, emerging market debt is currently attractive as the US dollar has weakened since late 2024, creating opportunities. Given the retracement, it has created an opportunity for emerging markets. Attractive valuations have led to investments in Mexican and South African government bonds. From our perspective emerging markets offer good diversification with attractive yields and stable fundamentals.
We have a broad range of fixed income capabilities including active, passive, mainstream, and innovative solutions.
Whether you’re looking for income, diversification, capital preservation or total returns, our global fixed income teams have the strategies, the scale and the flexibility needed to match your objectives as markets evolve.
We have more than 200 fixed income specialists who invest across regions, investment styles and capital structures. Their expertise spans the entire fixed income spectrum, covering credit, rates and currencies.
Source: Invesco as of 31 December 2022.
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