In our latest webinar, Market Insights Strategist Ben Gutteridge joined Co-Head of Fixed Income Thomas Moore, Fixed Income Fund Manager Rhys Davies, and Macro Analyst Mark McDonnell to discuss how fixed income can best support portfolio outcomes, covering positioning, rates, spreads, credit quality and defaults. The panel shared their views and insights to help investors understand where potential opportunities may lie in the bond market.
Inflation continues to shape bond market outcomes. Renewed inflation concerns, partly driven by energy prices and geopolitical tensions, have introduced greater uncertainty, particularly for government bonds. This has contributed to increased volatility and a less predictable investment backdrop.
Despite this volatility, credit markets have been more stable. After widening initially, credit spreads have tightened again, and high-yield bonds have performed relatively well.
This suggests markets are, for now, looking through near-term uncertainty and pricing in more stable conditions ahead.
Yields across fixed income remain attractive, offering income opportunities not seen in recent years. However, the additional yield from credit over government bonds is relatively limited.
This means investors are receiving less compensation for taking on additional risk, making selectivity more important.
Geopolitical developments remain a key area of uncertainty. Ongoing tensions, particularly in energy-sensitive regions, could keep inflation elevated and weigh on economic growth if they persist.
While markets currently appear positioned for a positive outcome, any deterioration could lead to renewed volatility.
The UK economic outlook presents a mixed picture. Growth remains relatively subdued, and the labour market has loosened compared to previous years. This may reduce the risk of persistent inflation.
As a result, there is uncertainty around the path of interest rates. While markets are pricing in rate increases, central banks may adopt a more cautious or flexible approach.
One of the key themes was the changing relationship between bonds and equities. Traditionally, government bonds have acted as a diversifier during periods of market stress. However, this relationship has weakened in recent years, particularly in periods of higher or more volatile inflation.
As a result, bonds have not always delivered the level of protection investors might expect when equity markets fall.
The rise of artificial intelligence is beginning to influence fixed income markets in two key ways:
First, large-scale investment in AI infrastructure, particularly data centres, is supporting economic activity, especially in the US. Second, much of this investment is being funded through debt issuance, creating new opportunities within credit markets.
While this presents potential opportunities for investors, it also requires careful assessment. The long-term outlook remains uncertain, particularly around whether AI will create sustained winners or become more commoditised over time.
Fixed income markets remain shaped by a more uncertain backdrop, in which traditional diversification benefits have weakened, and inflation continues to play a central role.
Ultimately, flexibility remains key. Maintaining liquidity allows investors to respond to market dislocations and take advantage of opportunities as they arise.
In a more complex and less predictable environment, a selective and active approach to fixed income may help investors navigate evolving market conditions.
Find out more about our Fixed Income capabilities here.
Insurers need to diversify return sources, reduce exposure to correlated shocks, and optimise capital efficiency. Selective allocations to private markets can help.
European ETFs gathered US$45bn in May. Explore the latest ETF Snapshot for market flows, upcoming IPOs, fixed income yields and currency hedging, and the outlook for gold.
Discover our Global Fixed Income Strategy Monthly Report, we offer an outlook for interest rates and currencies and look at which fixed income assets are favoured across a range of market environments.
