2025 Global Fixed Income Outlook
Fourth Quarter
Key Takeaways
We expect uncertainties from tariffs, Federal Reserve (Fed) policy and inflation to foster below-trend growth and challenge traditional bond allocations.
Given today’s mix of opportunities and risks, we believe investors should consider reassessing the fixed-income strategies in their diversified portfolios.
We believe most fixed-income sectors offer performance potential, particularly when investors implement an active, diverse and dynamic approach.
Our analysis of recent data suggests the U.S. economy should continue expanding into year-end and early 2026. We believe this outlook should bode well for most fixed-income sectors.
However, the path forward may be a bit bumpy. Issues related to tariffs, Fed policy and inflation remain unresolved, complicating the route. We believe this backdrop demands a fresh perspective toward fixed-income allocations.
Tariffs: When Will We Feel Their Full Effects?
While President Donald Trump’s administration has secured trade deals with several countries, it’s still working to sign agreements with China, India and other key markets. Accordingly, price adjustments remain likely in the months ahead.
However, our view on the effects of tariffs differs from broad market sentiment. Specifically, we don’t expect tariff-related price adjustments to be persistent sources of inflation, whereas the market does.
Fed Policy: Are More Rate Cuts in Store?
The Fed continues to operate in a tricky backdrop.
On the one hand, job growth is slowing, suggesting that restoring labor market health may require additional rate cuts. On the other hand, economic growth remains solid, and inflation is still above target — factors that don’t typically coincide with rate cuts.
We expect the Fed to retain an easing bias and engage in a slow, low-conviction rate-cut cycle. The low-volatility macroeconomic environment and intermittent Fed policy support should keep financial conditions relatively easy.
In our view, lower job creation isn’t necessarily a reason to worry. The labor supply is declining, but so is the demand for labor. This means balance is returning to the labor market.
Inflation: Where Are Consumer Prices Headed?
We expect inflationary pressures to start building next year. The federal tax benefits and other incentives that kick in next year, along with corporate reshoring initiatives, could trigger a capital spending boom, bolstering economic growth. In this environment, we would expect inflation to rise.
Meanwhile, if the Fed embarks on an aggressive rate-cut campaign, inflationary pressures could become even stronger. Easing monetary policy in an environment of fiscal stimulus would likely elevate inflation.
Exploring Dynamic Approaches in Fixed-Income Markets
Over the last few years, the normalization of bond yields has helped restore the traditional role of fixed income assets in asset allocation strategies.
However, the “old way” of buying and holding core bonds may not be appropriate for many investors in today’s complex market.
In our view, the current backdrop of soaring government spending and debt, volatile interest rates and higher inflation requires an active, opportunistic fixed-income approach. While core bonds still have a role, we believe maintaining flexibility and strategically allocating and adjusting fixed-income assets are prudent.
For example, actively adjusting duration, yield curve and credit risk exposure may help investors navigate evolving market conditions.
Additionally, opportunistically allocating to higher-income securities or underfollowed sectors may enhance longer-term performance potential.
U.S. Government Bonds
With the Fed resuming its easing campaign, we expect the yield curve to steepen, largely from shorter-maturity yields declining.
Meanwhile, we expect the yield on the 10-year Treasury note to settle in a near-term range of 4% to 5%. If the Fed aggressively cuts rates, we believe the yield may reach 5% due to heightened inflation worries.
Outside the U.S., we believe government bonds in Germany, New Zealand and Canada offer attractive value versus the U.S. market.
U.S. Securitized Assets
Among credit markets, we still believe structured credit securities offer some of the best relative value opportunities in the fixed-income market. Specifically, the agency MBS sector remains attractive, but recent spread tightening and low volatility in this high-quality sector keep us watchful.
We also favor ABS, where fundamentals remain resilient, investor demand remains strong and spreads continue to tighten. We remain diligent in seeking relative value opportunities while maintaining patience into spread tightening.
Municipal Bonds
Valuations remain attractive at the long end of the curve. While credit spreads remain tight, we are finding attractive opportunities among municipal bonds in development districts, prepaid energy, multifamily housing and retirement community sectors. We’re more selective in the higher education, health care and state GO sectors, given potential funding challenges from U.S. fiscal policy.
Overall, we believe the relative high quality and longer duration of municipal bonds may appeal to investors looking to reallocate cash. Municipal credit fundamentals should remain stable in the near term, largely due to reserve fund balances and conservative budgeting practices.
U.S. and Non-U.S. Corporate Bonds
With corporate valuations remaining near multidecade tight levels, we continue to focus on security selection. Accordingly, we are drawing on our stringent credit research focused on identifying issuers with attractive valuations and solid fundamentals. Banks, financial companies and utilities represent our largest investment-grade sector weightings. Among high-yield corporates, we favor shorter-maturity, mispriced bonds with improving credits.
In Europe, we are mindful of fiscal discipline concerns in several countries. We remain cautious toward European industrial-related bonds, favoring financial sector subordinated bonds.
We are also finding higher-yielding opportunities among Latin American corporates.
Money Markets
After extending the portfolios in the third quarter, we see few, if any, duration opportunities for the fourth quarter. Additionally, following weak payroll data, the money market yield curve inverted, further limiting duration opportunities. We will seek to boost portfolio liquidity, which we plan to deploy at year-end, while maintaining yield.
We expect to focus on the highest-yielding maturity segment in our space (overnight) and avoid purchasing into the tightest spread levels of the year. We also plan to swap underperforming Treasury floaters for commercial paper, offering yield advantages.
Overall, we expect this strategy to dramatically shorten duration compared with the third quarter, while increasing liquidity and credit.
In the tax-exempt portfolios, we plan to extend duration due to the lag in the SIFMA Municipal Swap Index resetting lower. The index has an uncorrelated relationship with the Fed’s rate cut.
Emerging Markets (EM)
Valuations among U.S. dollar-denominated sovereign bonds appear tight overall. Accordingly, we favor dollar-denominated quasi-sovereigns and corporate bonds offering attractive spreads versus sovereigns. We remain selective in the high-yield space.
Overall, we prefer local currency bonds, which likely would benefit from further U.S. dollar weakness and Fed easing.
Additionally, many emerging markets are in rate-cutting cycles, making their debt securities attractive. Meanwhile, a weaker U.S. dollar should support EM currencies. We currently favor higher-yield currencies in Brazil, Mexico, Indonesia and South Africa.
Explore Our Global Fixed Income Capabilities
The letter ratings indicate the credit worthiness of the underlying bonds in the portfolio and generally range from AAA (highest) to D (lowest).
References to specific securities are for illustrative purposes only and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
Diversification does not assure a profit nor does it protect against loss of principal.
Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
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