Inevitable volatility as a source of opportunities on Fixed Income markets

The ambitions of the new U.S. president and Europe’s economic sluggishness are creating strong divergences in macroeconomic outlooks on either side of the Atlantic. In this environment, a flexible and responsive approach will be key to seize opportunities that may arise on the Fixed Income markets from decisions with contradictory effects across the different zones.

The decoupling of macroeconomic cycles between Europe and the U.S. is set to be a defining feature of fixed income markets in 2025. This phenomenon, which began in late 2024 following the U.S. election, is already reflected in rate expectations for 2025: unchanged in Europe with still 4.5 cuts projected, whereas in the U.S., expectations have plummeted from nearly 8 anticipated cuts last September to just one today¹. Long-term rates follow a similar pattern, remaining stable in Europe while rising by more than 90 basis points in the U.S. since the Fed’s first cut in September².

From a macroeconomic perspective, this divergence is explained by upward revisions in inflation and growth forecasts following Donald Trump's return to the White House. His statements have raised concerns about inflation risks, though his administration’s policies may have only a transient impact on inflation but a more lasting effect on growth.

Moreover, sovereign debt refinancing emerges as another major issue. With a persistent deficit, the U.S. will need to refinance $2 trillion in 2025³, the same amount as in 2024. In Europe, the figure reaches €800 billion, against a backdrop of central banks reducing their balance sheets⁴.

All these uncertainties are pushing term premiums higher and could steepen yield curves. Between cyclical divergence and refinancing concerns, volatility appears inevitable, generating opportunities on both sides of the Atlantic.

On the credit markets, spreads⁵ have tightened significantly since 2022. In the U.S. and emerging markets, valuations are reaching levels rarely seen in the past 20 years, making these markets unattractive. Conversely, European Investment Grade⁶ bonds still offer an interesting premium, particularly in non-cyclical sectors, which tend to be more resilient to macroeconomic shocks. Similarly, financials continue to offer an attractive premium, supported by strong solvency and profitability ratios.

In the High Yield⁷ segment, a selective approach is essential. The primary market for B and BB-rated issuers remains dynamic, driven by strong investor appetite. Many companies are anticipating the refinancing of their 2026-2027 maturities and extending their maturity horizon.

In this environment, the investment strategy of R-co Valor Bond Opportunities proves particularly relevant. This flexible fund captures opportunities across global fixed income and credit markets, investing in traditional bonds as well as derivatives (futures, interest rate swaps, CDS⁸). Its active approach targets volatility below 5%, combining macroeconomic analysis, credit research, and quantitative screening to select directional and relative value strategies.

Relative value strategies, based on identifying historical anomalies through quantitative screening, are particularly effective. We compare absolute and relative yield levels across all maturities in main markets and analyse credit curve andand spread between bonds and- CDS spreads.

The portfolio is currently positioned to benefit from falling rates in Europe, particularly through inflation-linked bonds, while favoring short maturities (2 to 5 years) in the U.S. Among our key convictions, we are betting on the convergence of European rates, particularly between the UK and the Eurozone. Additionally, we believe U.S. interest rate volatility is overestimated and seek to capitalize on it through options selling.

On the credit side, we focus on carry strategies while limiting directional risk. We invest in high-rated Investment Grade bonds (A and BBB+), benefiting from relative undervaluation in this segment, and hedge them via CDS to contain the volatility of risk premium. Our High Yield exposure focuses on issuers likely to refinance early, as well as European financial subordinated debt with a call date of less than three years.