Fixed Income Quarterly Strategy — April 2025

While the gradual normalization of monetary policies was well underway, the trade war initiated by Donald Trump has reinforced expectations of rate cuts, against a backdrop of growing fears of an economic slowdown in the US.

From desynchronization to convergence

Since last year, on both sides of the Atlantic, the normalization of monetary policies had been quietly underway before being disrupted by a resurgence of geopolitical and trade tensions, with Donald Trump's recent announcement of new tariffs. These protectionist measures rekindled market volatility and uncertainty about the trajectory of global growth.

In Europe, the beginning of the year was marked by a rise in yields, particularly on the long end of the curve, triggered by the announcement of fiscal stimulus measures in Germany and the increase in European defense budgets. The 10-year rate thus rose to 2.90%, i.e. +53 basis points (bps), while at the same time the 2-year rate remained stable¹, giving rise to a steepening movement². Conversely, since the start of the year, yields across the Atlantic have been on a downward trend, with the US 10-year at 4.21%¹, as markets have turned their attention more to geopolitical and trade developments, in particular the new US tariffs. 

Investors are concerned about the impact of these measures on growth and inflation in the US and Europe. In this climate of uncertainty, monetary policy expectations have been revised. As of April 11, the market now anticipates just over three further rate cuts by the ECB and the Fed in 2025, which would bring deposit rates down to 1.50% - 1.75% and 3.50% - 3.75% respectively by the end of 2025³.

Caution prevails in the face of US slowdown

The current market configuration, marked by a return to less risky assets, has resulted in credit spreads4 widening. At the same time, European yields are easing, particularly on German bonds, whose 10-year yield has fallen to close to 2.50%¹.

In this environment, Investment Grade⁵ bonds logically outperformed the High Yield⁶ segment, with the former gaining +0.48% versus -0.86% for the latter, for yields of 3.4% and 6% respectively. From a sector point of view, cyclical stocks such as the automotive sector underperformed, while the financial and real estate sectors, which are more oriented towards domestic markets, posted better performances.

Despite this volatile backdrop, European credit continues to demonstrate a certain resilience, underpinned by solid fundamentals overall. Carry trade remains an attractive driver, with yields still high compared with the last ten years.

Our positioning in the credit market

Widening spreads and uncertainties about global growth call for caution, but they should not prevent us from managing with conviction, flexibility and opportunism. Adjusting duration and rigorously selecting issuers, with particular attention to credit quality, will be key over the coming months. In this context, financial subordinated bonds, despite their recent volatility, continue to offer attractive entry points. Similarly, maturity funds remain attractive for investors seeking visibility in a turbulent environment.