Payden & Rygel: What's ahead for Fixed Income in 2025?

Payden & Rygel: What's ahead for Fixed Income in 2025?

December 19, 2024

Fixed Income Outlook
Outlook vooruitzicht (01)

Last year marked a pivotal year for fixed income markets, as central banks got inflation under control without triggering recession, achieving the rare “soft landing” so positive for bonds. Now, as 2025 begins, portfolio managers and market strategists from Payden & Rygel review the opportunities and risks ahead for four bond market sectors: high yield, emerging markets, global bonds and low duration securities.

Central banks are going to be able to navigate a soft landing, and in that environment, we expect strong economic conditions, robust employment, and declining inflation.

Resurgent inflation unlikely but possible. We anticipate that the ultimate Republican agenda to be less inflationary than feared by the markets. However, if Congress starts passing an inflationary agenda including tariffs, lower taxes, curbs on immigration, higher fiscal deficits, it could cause a reacceleration of inflation that would be problematic for fixed income markets.

Healthy yields on investment grade assets. We expect 2025 to be a good year for fixed income, following two strong years in 2023 and 2024. If our soft-landing forecast holds up, we believe investors will be rewarded. We expect all-in returns on investment grade assets in the 5% area.

An emphasis on high quality, liquid issues. A soft-landing environment, with strong economic conditions, robust employment, and declining inflation, should be good for credit across the board. However, less liquid and lower quality credits have outperformed recently. Spreads have narrowed to the point where you’re not getting paid to take on the risk of lower-rated or less liquid bonds. As a result, we continue to overweight quality and liquidity.

Value in regional bank debt. The new administration will likely benefit banks, easing regulations that weigh on profits. In addition, banks will benefit from a stronger economy and lower corporate taxes will benefit the smaller cap and more regional businesses. We see particular value in regional banks that operate more in a geographically concentrated area, like the Midwest, or have a focus on middle market businesses. They are trading cheap versus other banks out there and should benefit from a Trump administration and a Republican Congress and Senate.

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