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.
As we close the year with multiple rate cuts from central banks, including the Federal Reserve and European Central Bank, what are the implications of this dovish shift and where can investors find value in the fixed income space?
According to Mohammed Kazmi, the starting point for this easing cycle is very different given the backdrop of resilient growth, elevated inflation, and fiscal dominance. This context suggests that cutting cycles may not be as aggressive as what we have observed in the past, and the inflation environment is likely to stay higher.
For bond investors, this presents an opportunity to take advantage of the value within credit markets, as the default rate is expected to remain benign amidst supportive growth conditions. Noteworthy opportunities can be found in high-yield bonds and subordinated financial debt (AT1s), which continue to offer attractive yields.
Whilst market volatility may continue, the high yield segment can act as a buffer during periods of spread-widening. Additionally, central banks still have significant capacity for further easing if required, and this should help limit potential tail risks and allow investors to focus on maximising the carry opportunity on offer.
