Fixed income in 2025: opportunities & surprises

With December upon us, that means one thing for investment managers across the industry: it’s time to make your outlook predictions.

Outlook calls are always notoriously tricky to make, and given markets are in ‘wait and see’ mode ahead of Trump taking office again, predictions are even harder this year. The first 60 days or so of Trump’s presidency should set a clearer tone for the rest of 2025, but we can still make some predictions for fixed income as things stand.

Presuming he takes a similar stance to that of his first term in office, it’s likely Trump’s actions will be good for growth, slightly inflationary and drive equity markets higher with a broadening out.

As such, we think US high yield will continue to earn its place in fixed income portfolios going into the new year.

Although we have seen some signs that the US economy is slowing, they are countered by high levels of consumer confidence and a resilient labour market. An uptick in inflation is not necessarily a bad thing for high yield either, as long as it doesn’t get out of control. On the basis we see a continuation of the current momentum rally, then levels of coupon income should remain attractive, alongside select idiosyncratic stories, where the corporates behind the bonds are set to benefit from US exceptionalism.

To add a note of caution, it’s prudent to remember that markets are already trading at high levels – they could go higher still, but the chance of a pullback is also real. This could push performance later into the year. In today’s environment, everything being equal, then things should be fine, but if Trump kicks off a trade war and we see a higher US Treasury curve, then that could begin to impact risk appetite, prompting markets to take a breather.

So that’s what we think could happen, but there’s always scope for surprises.

Tariffs are one of the major unknowns for markets at the moment.

Trump’s proposed cabinet leans hawkish on the topic, so we expect the threat of them to be used as a powerful negotiating tool. However, the big surprise could be that the threat doesn’t turn into reality, or that tariffs are rolled out in a more measured manner than headlines suggest. Essentially, things don’t end up as bad as everyone is expecting.

In this scenario, Europe’s economy (which has been largely unmentioned to-date in terms of tariff threats) should get a boost. Europe has had a tough time, with general economic weakness exacerbated by deepening gloom in Germany and multiple idiosyncratic issues in France. Tariffs would be a further negative, given Europe’s export vulnerability.

But if they don’t play out, European fixed income stands to benefit from a powerful tailwind. Some of the high yield segments that have struggled recently like autos, should be notable beneficiaries.

It's an outside chance at this stage but is something that we are monitoring closely given how much bad news is priced into Europe.

Elsewhere, if Trump can instigate a ceasefire in Ukraine, that would also be a positive surprise for risk sentiment, in Europe and beyond.

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