Δ Overweight ∇ Underweight — Neutral
Bonds – at a glance —
28 APRIL 2025
- We continue to view global bonds as a core holding. Uncertainty over US trade policy and, by extension, the growth and inflation outlook, have driven yield premia (the spread on higher yielding bonds over risk-free assets) higher. However, our core expectation for an economic soft landing, aided by Trump’s likely pivot to tax cuts and deregulation policies and monetary policy flexibility should help cap bond yields and support future bond returns. Additionally, we believe headline yields remain attractive, particularly compared to cash, helping to mitigate reinvestment risk when central banks [E1] cut rates further. Risks to our view include a reduced rate cut expectations and a surge in term premia in long-term bonds due to sticky inflation and rising government debt.
- We upgrade Developed Market (DM) Investment Grade (IG) government bonds to Overweight. Major central bank rate cuts should support performance. Additionally, we anticipate interest rate volatility to subside gradually as leveraged positions in the market are partially closed. We downgrade Emerging Market (EM) USD government bonds to Underweight and keep EM local currency (LC) government bonds a core holding (Neutral). Investors are demand high yield premia on bonds from major exporting countries, keeping yields elevated for EM bond asset classes. However, a weakened USD gives EM central banks greater monetary policy flexibility and supports EM LC bonds relative to their USD counterparts.
- DM IG corporate bonds remain a core holding (Neutral). While tight yield premia indicate rich valuations, we believe these are supported by solid fundamentals. We move DM High Yield (HY) corporate bonds to Neutral as demand for higher risk premia is balanced by low default expectations under an economic soft-landing scenario. Asia USD bonds are also core holdings (Neutral). Although most Asian economies face US tariff risks, stronger external balances, flexible monetary policy tools and robust domestic support are capping significant spikes in yields.
Developed Market Investment Grade government bonds – Less Preferred holding Δ
28 APRIL 2025
The Bullish Case:
+ High credit quality
+ Attractive yields
The Bearish Case:
– High sensitivity to inflation
– Monetary policy
Developed Market Investment Grade corporate bonds – Core holding —
28 APRIL 2025
The Bullish Case:
+ High credit quality
+ sensitive to falling yields
The Bearish Case:
– Elevated valuations
Developed Market High Yield corporate bonds – Preferred holding —
28 APRIL 2025
+ Attractive yield, low rate sensitivity
The Bearish Case:
– Elevated valuations
– Sensitive to growth
Emerging Market USD government bonds – Core holding ∇
28 APRIL 2025
The Bullish Case:
+ Attractive yield
+ Sensitive to US rates
The Bearish Case:
– EM credit quality
– US trade policy risks
Emerging Market Local currency government bonds – Core holding —
28 APRIL 2025
+ Attractive yield
+ Benefit from USD weakness
The Bearish Case:
– US trade policy risks
Asia USD bonds – Core holding —
28 APRIL 2025
The Bullish Case:
+ Moderate yield
+ Low volatility
The Bearish Case:
– Sensitive to China growth