Which events stand out when trying to make predictions about the bond market in 2025? 

2024 was undeniably a volatile year for bond investors. Markets held their breath in anticipation of the US Federal Reserve (Fed) finally initiating long-awaited interest rate cuts. Later, they were on edge ahead of the US presidential and legislative elections in November. With three rate cuts undertaken before the end of 2024 and an election outcome consisting of a clear Republican sweep (i.e. Republicans won the presidency, the Senate, and the House of Representatives), many of the unknowns that the market previously had to contend with became known. However, actual policy implementation is still not clear. 

Which areas do you see as most interesting?

One thing that emerged from the events towards the end of 2024 was the assumption of higher nominal US growth in the coming quarters. We expect this to be driven by real growth, as well as inflation (which we expect to pick up again under a Trump administration). This would ordinarily be seen as a bearish signal for bonds, and one would expect yields to rise, but they already rose in the run-up to the elections. In addition, higher nominal growth, combined with a Fed that has indicated that it is still willing to cut interest rates, should make it easier for issuers to refinance their debt. The knock-on effect should then be lower default rates. 

What about European bonds?

The situation here is a little different. As with all things in life, it is a matter of balance. In Europe, we have a more cautious approach to credit risk. Not only is the continent struggling to improve domestic consumption, but it now faces the prospect of a new US administration for which ‘America First’ will be the mission statement. This leads us to shy away from investing in European high-yield issuers and to stick with investment-grade bonds instead. 

Which maturity do you recommend?

When it comes to how to position a bond portfolio in 2025, as we begin the year, our view has not changed substantially. Yes, long-term yields look appealing again, but we believe that it is too early to call them attractive yet. For now, we would prefer to hold bonds with maturities of 3–7 years. That being said, in Europe, given our preference for better credits, we would be willing to go a little further along the duration curve to generate more risk/return. Moreover, we expect 2025 to be another year in which it will pay to employ a tactical and nimble approach towards duration: adding it when bond yields rise quickly and reducing it when those yields fall too quickly.

What’s your view on emerging market debt?

Towards the end of 2024, we decided it would be prudent to take some chips off the table when it comes to exposure to emerging market fixed income risk. Consequentially, we downgraded hard-currency emerging market government bonds to Neutral. We maintain our Overweight rating on hard-currency emerging market corporate bonds given the limited net supply compared with healthy investor demand. However, given the large ‘known unknown’ in the space, namely whether potential trade tariffs introduced by the incoming Trump administration will be more damaging to the emerging market space than is currently anticipated, we will be watching closely as events unfold. 

Find out more about the current investment environment in our Market Outlook for 2025.