Why will Fixed Income still be essential in 2025?

Geopolitical uncertainty has been driving markets since the beginning of the year. While central banks were steadily progressing towards normalization, the unpredictability of the new U.S. president and Europe’s sudden shift have reignited interest rate markets.

Since his election, Donald Trump has been sending mixed signals to the markets. Beyond the issue of tariffs, his approach to resolving the Russia-Ukraine conflict has triggered a strong reaction in Europe. On March 4, the EU-27 agreed on an €800 billion plan to strengthen the region’s defense¹. That same evening, Germany lifted its budget cap, announcing €500 billion in investments to upgrade its national infrastructure². The next day, the 10-year Bund yield surged by 30 basis points³—its largest increase since 1990—dragging European interest rates upward. These measures are expected to boost economic growth in the region but simultaneously pose an inflationary risk, especially as the ECB continues to struggle to reach its 2% target. Moreover, financing these measures and their impact on national deficits are putting pressure on interest rates.

Even before these announcements, European interest rate volatility was already being fueled by developments in the U.S. Investors remain attentive to the promises and policies of the new U.S. administration, although their long-term implementation and effects on U.S. growth and inflation remain uncertain. Amid these uncertainties, the correlation between U.S. and European interest rates has been volatile. Following a second rate cut in March, the market now expects only two additional ECB cuts in 2025. Meanwhile, in the U.S., the easing cycle is expected to be more gradual, with three rate cuts anticipated this year.

Despite tight risk premiums, the credit market remains attractive in an environment of global uncertainty, as it continues to offer an appealing yield while maintaining solid fundamentals. Companies remain financially healthy and demonstrate solvency levels that enable them to refinance easily. Additionally, given the valuation levels of risk assets, fixed income remains highly sought after by investors. The prospect of steady returns and income generation makes this asset class particularly appealing. However, this environment has created an unusual dynamic where corporate credit is favored over government debt.

Credit spreads continue to tighten. In the U.S., risk premiums are at their narrowest levels in 20 years, and we believe that market conditions warrant greater volatility. Interest rate volatility is likely to spill over into the credit market. In these more turbulent periods, conviction-driven management can fully demonstrate its value. Various strategies and asset classes could stand out in this context.

This situation calls for active and opportunistic management, where flexibility is key. Adjusting duration and sector exposure, combined with careful issuer selection, will be critical after years in which beta⁴ exposure was the main driver of performance. Investment-grade credit offers opportunities, but given current valuations, selectivity and agility are essential. Financial subordinated debt remains particularly attractive given the solid fundamentals of sector players. Maturity-based funds also retain their appeal. The current entry point is especially interesting, as yields have risen alongside interest rates. Lastly, the high-yield⁵ segment—particularly in shorter maturities—remains worth considering, as its yield levels can help offset market volatility.