Invesco Bond Market Insights

Our best ideas

1. We are positive on emerging market local currency bonds. EM local yields are attractive compared to developed market yields and we expect a weaker US dollar to boost EM currencies. A challenge to “US exceptionalism” could benefit EMs, as investors potentially rebalance capital away from the US.

2. We are positive on US investment grade. Lower all-in yields have slowed the recent rally in credit but strong technicals have supported the market - net supply has declined as COVID-era bonds mature, while supply remains steady compared to last year. Easing moves by the Federal Reserve would likely further support investment grade.

3. We see areas of opportunity in municipals. Tax equivalent yields are attractive, especially at the long end of the yield curve, making valuations look compelling for many investors. The fiscal bill did not impact munis much and we expect support for munis in the summer due toseasonal coupon payments and maturity flows, and reduced tax uncertainty.

4. We are positive on agency mortgage-backed securities. MBS spreads have lagged the post-Liberation Day market recovery and remain attractive, in our view. While we are cautious about near-term volatility, we are positive over the medium to long term, especially as we expect regulatory changes to boost bank demand for MBS.

Macro insights

Rates and currencies

• Macro data have been more stable than expected in recent months, despite uncertainty over US policymaking and its potential global impact. This stability in macro outcomes has supported markets.
• Though uncertainty around US administration policies has eased, it’s still likely to lead to slower US growth, temporarily higher inflation and a weaker dollar. We believe this macro backdrop is neutral for markets and we see opportunities in both currencies and rates.
• We believe the Federal Reserve is inclined to lower rates closer to neutral, though it could hesitate if inflation remains above its 2% target. We expect tariff price pressures to be passing and expect inflation to cool in 2026. Labor market softness, which we are starting to see, could be a catalyst for a cut. We anticipate two Fed rate cuts this fall.
• We expect the US dollar to continue to decline as global investors change their preferences away from US assets and because the dollar remains overvalued on a historical basis. We favor non-US bonds and emerging market local bonds.
• We favor short-term bonds, as central banks, including the Fed, are biased to cut rates and risk premia on longer duration bonds may increase with increased government spending.

Credit insights

Asset class views

• Strong investor demand has supported credit markets, and we expect this trend to continue. Despite relatively tight valuations, we favor exposure to credit assets while keeping risks well-contained.
• Investment grade valuations have been tight on a spread basis. With slightly lower all-in yields, the recent credit rally has slowed somewhat, keeping credit trading in a tight range.
• We remain neutral on US high yield. Strong inflows to the asset class have helped drive performance and credit fundamentals are solid, but valuations are tight. We are slightly positive on European high yield.
• Valuations in hard currency EM credit are tight but credit fundamentals are improving and inflows to the asset class have picked up. We are cognizant of idiosyncratic risks that could impact the broader market.
• Municipal tax equivalent yields look compelling for many investors, in our view. The US fiscal bill did not impact municipals much and if demand picks up, attractive valuations could drive positive performance.
• We are positive on mortgage-backed securities. Spreads are still above pre-Liberation Day levels, and we expect bank demand to increase on the back of regulatory changes.