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The high-income segment within fixed income is particularly well suited to the current times of robust GDP growth, elevated yields, and higher inflation.
"Inflation likely isn't behind us yet, and investors should be cautious if they're expecting interest rates to return to pre-Covid levels."
The US economy continues to expand at or above its potential, and rate cuts in 2024 are likely to have a positive impact on the real economy in 2025. The Federal Reserve may not have to ease policy too aggressively, and the short-term neutral rate could be higher than initially anticipated as inflation and fiscal spending continue to run high.
Meanwhile in Europe, while growth has been subdued, it remains well above recessionary thresholds, with the eurozone’s peripheral economies emerging as key drivers of growth. This trend should be further supported by a more dovish stance from the European Central Bank.
Overall, the easing bias among central banks is expected to mitigate downside risks to the growth outlook, enhancing the prospect of a soft landing.
As regards inflation, trends are unlikely to return to pre-pandemic levels, and central banks have become more tolerant of higher inflation.
Interest rates range-bound
The prospect of a soft landing and fiscal policy support remove the need for aggressive rate-cutting.
Higher inflationary backdrop
The robust growth outlook will likely prevent inflation from returning to pre-Covid levels.
Fixed income attractiveness
Higher yields provide carry opportunities and volatility buffers.
With robust growth and above-target inflation, the rate-cutting cycle is expected to be limited, favouring high-income credit and carry. Such an environment supports a barbell portfolio construction, which consists of combining short-dated quality credit and higher-income asset classes.
The objective is to maintain a similar profile to a vanilla 5-year investment-grade corporate bond allocation while locking in higher yields. A short-dated sleeve would bring defensiveness and income. A high-income sleeve would bring superior carry but not at the expense of liquidity.
Read our white paper (available only in English), ‘Global fixed income in the new inflation and interest rate regime’, to find out how UBP’s Fixed Income team see the outlook for bonds and what approach investors could consider for building their portfolios in the current environment.
Pick (at least one) of our experts’ newsletters below to download the white paper:
The views and opinions expressed by fund managers (internal or external) may differ from the house view. They are shared for informational purposes and do not constitute investment advice or a recommendation.
The Global Absolute Return Fixed Income team combines extensive experience with in-depth expertise across fixed income markets. Led by Philippe Gräub, the team includes seasoned experts in their fields who are dedicated to delivering superior risk-adjusted returns to investment portfolios.
Key facts and figures
27.03.2025
With inflation and interest rates pushing up rather than down and fast-changing policies and scenarios in the US, UBP’s fixed-income experts explore how investors can put together a flexible and resilient bond portfolio in an approach favouring the long term.
18.02.2025
The year started with volatility in rates, as the 10-year Treasury yield oscillates amid shifting market dynamics.
17.12.2024
In this podcast, our expert Mohammed Kazmi, Senior Portfolio Manager & Chief Strategist for Fixed Income, shares insights into the anticipated landscape for interest rates and credit markets in 2025.
24.09.2024
The positive view towards fixed income is best expressed through the higher-income segments of the market given robust nominal GDP growth and elevated all-in yields that are still in excess of the historical returns of global equities.
19.09.2024
Despite recent volatility, emerging markets (EMs) continue to hold significant potential for investors. The current global trends and market conditions present several tailwinds that can drive growth and create opportunities in EM fixed income investments. Here, we explore these tailwinds and discuss the investment implications for the second half of 2024.
