- Investment Director
France, Institutional
ChangeThe views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
Welcome to January’s edition of Bonds in Brief, our monthly assessment of risks and opportunities within bond markets for fixed income investors. Each month, we explore material macro changes and how best to navigate the latest risks and opportunities we see within bond markets.
Key points
- Fixed income markets generated positive total returns in January as investors scrambled to assess the implications of US tariffs. Global Treasury yields climbed early in the month as strong economic data dimmed rate-cut hopes in a number of countries, but reversed course following subdued inflation readings and a flight-to-quality rally driven by DeepSeek news.
- US President Donald Trump announced tariffs of 25% on Canada and Mexico, and 10% tariffs on China. Canada and Mexico announced tariffs on US goods in retaliation, and China followed suit with tariffs on US$14 billion of US goods. While the tariffs on Canada and Mexico were delayed, an eventual full implementation of these could precipitate wider breakevens from higher inflation and a flatter nominal curve with lower real rates; wider credit spreads as part of a risk-off move; and lower equity prices as global trade absorbs these new tariffs.
- Monetary policy divergence continued. The US Federal Reserve (Fed) paused its rate-cutting while the European Central Bank (ECB) cut rates by another 25 basis points (bps), and the Bank of Japan (BOJ) hiked rates by 25 bps. Markets are pricing very gradual policy easing by the Fed and Bank of England, more cuts by the ECB and continued hikes by the BoJ.
- AI-related technology stocks suffered a rout after Chinese startup DeepSeek claimed to offer an AI model with competitive performance at a fraction of the cost, and global Treasuries rallied on the wider risk-off move.
What are we watching?
- Geopolitical uncertainty has moderated in the Middle East with the temporary Israel/Hamas ceasefire, a new Lebanese president and the fall of the Assad regime, but the conflict remains far from resolved. Domestic politics in Israel and Iran remain potential concerns and could still cause flare ups. Oil prices retreated since the ceasefire but remain vulnerable to tariff developments.
- Gas prices in Europe climbed steadily over the last year, driven by faster depletion of gas storage, the halting of the remaining gas flows from Russia via Ukraine and increased global competition for gas. While capacity is likely to expand in the coming years, the risk in the short term is that gas prices remain elevated, feeding into higher energy prices and keeping inflation pressures elevated.
- Trade wars. US tariffs on Canada, Mexico and China and likely tariffs on the EU would fundamentally shift economic ties worldwide. Retaliatory tariffs could exacerbate inflation and currency volatility if negotiations are not forthcoming, and will have ramifications for global supply chains, with excess capacity likely diverted away from the US.
- German election. Polls for the 23 February election point towards a centre-right coalition, which would likely have the majority required to support loosening the constitutional debt brake to foster still lacklustre German growth. While exposed to tariff risk, the German cycle may have reached a tipping point, with signs of industrial production recovering and consumer resilience. The ECB may find it difficult to keep cutting rates if upside surprises to the European economy materialise driven by looser fiscal policy, particularly in the core, potentially putting upward pressure on bund yields.
- High-yield stress has come into focus, as a number of issuers in the European market continue to struggle. Telecoms giant Altice France (one of the largest issuers in the region) is in discussions with creditors to restructure its substantial debt pile, with €600 million due for refinancing in 2025 alone. And bonds issued by Spanish auto parts manufacturer Antolin saw a rout in January as US tariffs would impact demand for their products. A slow uptick in distressed activity introduces uncertainty in what has otherwise been a very benign credit cycle for the best part of a decade.
Where are the opportunities?
- Given how drawn out and uncertain the rate cycle has been, our key conviction remains a focus on higher-quality total return strategies that are less constrained by benchmarks. This could include global sovereign and currency strategies that have the potential to shine during these periods or unconstrained strategies that are able to navigate the late cycle by allocating across different sectors. These strategies could also enable investors to allocate capital away from cash and reduce reinvestment risk without taking on significant duration or credit risk.
- With cuts on the way and despite tight spreads, we see core fixed income, particularly credit, strategies as increasingly attractive from both an income and capital protection perspective. All-in yields remain attractive for investors looking to de-risk within a broadly diversified portfolio. And for European investors looking to protect themselves from ongoing volatility, high-quality income may offer an attractive avenue not just in local but also global markets.
- We think high-yield and emerging markets debt still offer potential, but advocate a cautious approach given how late we are in the cycle and the normalising of default rates relative to current spreads. At the same time, the robust additional income potential may make high yield a good equity substitute. For all higher-yielding credit, we believe an “up-in-quality” issuer bias is warranted.
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Monthly Market Review — October 2025
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