With macroeconomic uncertainty dominating 2025, fixed income has become a more compelling asset class, offering resilience, diversification and attractive yields across several segments.
Capital Group’s latest mid-year outlook points to trade policy volatility, driven primarily by shifting US tariffs, as a key catalyst behind equity market jitters and an economic slowdown. Amid this backdrop, bond investors are increasingly seeking opportunities in government bonds, securitised credit and high-quality corporate debt.
Following a severe sell-off in equities earlier this year, long-duration government bonds have regained their traditional defensive characteristics. In the US, while the Federal Reserve has paused its rate-cutting cycle, expectations of future cuts remain. The 10-year Treasury yield stood at 4.39% as of Jun 17, up even as shorter-dated yields declined — steepening the curve. Investors are balancing concerns of higher inflation with the risk of a downturn, both shaped by evolving tariff policy and persistent US fiscal deficits. This has kept long-term yields elevated and may allow for further steepening.
In Japan, government bonds saw the most pronounced steepening, triggered by concerns over increased supply and waning demand as the Bank of Japan tapers its quantitative easing programme. Capital Group believes this dislocation is temporary, with the BoJ expected to pause further hikes and address the supply-demand mismatch.
Securitised assets are also attracting renewed interest. Agency mortgage-backed securities (MBS) offer high nominal yields and spreads, liquidity, and lower rate sensitivity when compared to corporates. Higher-coupon MBS are particularly favoured for their compelling income profile and resilience in volatile markets. Subprime auto asset-backed securities (ABS), especially senior tranches, are also seen as attractive. These loans typically have shorter maturities and benefit from tightened lending standards.
Select commercial mortgage-backed securities (CMBS) are another area of opportunity. While office real estate remains under pressure, segments such as multi-family housing and logistics have performed well due to solid demand, healthy balance sheets and steady cash flows.
Investment-grade corporate bonds continue to offer robust fundamentals and strong return potential. Yields across the sector range from 4% to 8%, depending on credit quality, and are seen as a reliable proxy for future returns. Companies generally maintain conservative balance sheets and face low refinancing risk. In both the US and Europe, net debt-to-EBITDA ratios remain at or below post-GFC medians.
High-yield US bonds have shown resilience during this year’s equity market volatility. As of early April, while the S&P 500 was down 15%, high-yield bonds fell just 1.8%. This compares favourably to the 25% drawdown experienced during the global financial crisis. The sector’s credit quality has structurally improved over the past two decades, with BB-rated bonds now accounting for more than 50% of the market.
In the emerging markets space, local currency bonds are well positioned to benefit from easing inflation, falling energy prices and a less hawkish global policy stance. A lower rate path is expected across most EM countries. Capital Group highlights that local ownership of EM debt has grown, making capital markets less vulnerable to foreign outflows. Fundamentals remain solid, and if global capital flows pivot away from US assets, EM debt markets have ample capacity to absorb inflows.
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The auto sector, despite facing structural headwinds from tariffs and the EV transition, still offers opportunities. For instance, Ford’s bonds, currently rated BBB, trade wider than some BB-rated industrials, implying a potential downgrade is already priced in. Should Ford be downgraded, spread tightening could occur as high-yield buyers step in. Solid balance sheets and liquidity positions mean that many names in the sector are prepared to manage ongoing disruption.
Overall, while macro uncertainty persists, fixed income investors have a broad array of options. Long-term yields, improving credit fundamentals, and the return of bonds as equity diversifiers have set the stage for fixed income to reassert its role in diversified portfolios.
