Invesco Bond Market Insights

Our best ideas

1. We remain positive on emerging market local currency bonds. We believe we are at the beginning of an improving environment for EM local debt: EM local yields are attractive relative to developed market yields, flows into the asset class have risen on the back of robust fundamentals and the downside momentum in the US dollar should favor non-US assets from a currency perspective.3 We see areas of opportunity in municipals. We think muni tax equivalent yields are attractive, especially at the long end of the yield curve, making valuations look compelling for many investors. The new US fiscal law did not impact munis much, and we see opportunities in various sectors of the market, including transportation and private higher education.

2. We are positive on US investment grade. Investment grade valuations are tight on a spread basis, but yields still look attractive, in our view. Market technicals have been very strong with rising redemptions from COVID-era issuance and a pick-up in tender activity versus relatively unchanged gross supply compared to last year.

3. We see areas of opportunity in municipals. We think muni tax equivalent yields are attractive, especially at the long end of the yield curve, making valuations look compelling for many investors. The new US fiscal law did not impact munis much, and we see opportunities in various sectors of the market, including transportation and private higher education.

4. We see areas of opportunity in structured debt. Valuations on agency mortgage-backed securities still look attractive, in our view. In the structured credit sectors, we see pockets of opportunity relative to corporate credit in non-agency residential mortgage-backed securities, commercial mortgage-backed securities and asset-backed securities.2 We are positive on US investment grade. Investment grade valuations are tight on a spread basis, but yields still look attractive, in our view. Market technicals have been very strong with rising redemptions from COVID-era issuance and a pick-up in tender activity versus relatively unchanged gross supply compared to last year.1 We remain positive on emerging market local currency bonds. We believe we are at the beginning of an improving environment for EM local debt: EM local yields are attractive relative to developed market yields, flows into the asset class have risen on the back of robust fundamentals and the downside momentum in the US dollar should favor non-US assets from a currency perspective.3 We see areas of opportunity in municipals. We think muni tax equivalent yields are attractive, especially at the long end of the yield curve, making valuations look compelling for many investors. The new US fiscal law did not impact munis much, and we see opportunities in various sectors of the market, including transportation and private higher education.

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.